- • April 16, 2018
What is a “Limited Power of Appointment” and Why Should You Include It in Your Trust? – Spring 2018
A “limited power of appointment” is a useful tool in estate planning. We often suggest that clients include the power in their wills and trusts because it lets the holder of the power adjust an estate plan, in a limited way, to accommodate to circumstances that were not known when the estate plan was executed. A power is called “limited” if the holder of the power cannot exercise the power in favor of herself, her estate or the creditors of her estate. Because it is limited, the assets subject to the power don’t get added to the power holder’s estate for estate tax purposes.
Parents’ estate plans often deal with concerns about their children’s solvency, marriages, ability to manage assets, and health problems, as well as wealth disparities between children. If these problems arise after the death of the first parent to die and before the death of the survivor, a limited power of appointment gives the surviving parent a “second bite at the apple” to adjust the plan to deal with those changes.
Here’s an example:
Our client, Fred, has created a trust that holds most of his assets. If Fred’s wife, Eliza, survives him, the assets are held for her benefit until her death. Fred gave Eliza a limited power of appointment over disposition of the trust assets at Eliza’s death. If she doesn’t exercise the power, at her death the trust will terminate in favor of their two adult children, a son and a daughter. Unfortunately, after Fred’s death their son became severely addicted to drugs, and Eliza doesn’t think it best for him to inherit trust assets outright. By exercising her limited power of appointment, Eliza can direct that the trust assets that would have been payable to their son at her death should instead be held in continuing trust for the benefit of their son for the rest of his life, with remaining trust assets passing to his descendants at his death.
A limited power of appointment can be granted over all or only certain assets in a trust. In our example, if Fred had a family vacation home that was held in his trust for the benefit of Eliza during her life, he might want to grant her a limited power of appointment specifically to let her determine which child would be in the best position to receive it at Eliza’s death.
It is important for a trust to be specific as to how the limited power of appointment can be exercised, in order to make sure that it is exercised intentionally and not as part of a general disposition of assets by the power holder. We usually require either specific exercise by will or by notarized document delivered to the trustee during the lifetime of the holder.
Consider asking your lawyer to include limited powers of appointment in your trust documents if you think they may be useful.