A power of appointment trust is a type of marital deduction trust which gives the surviving spouse the authority to choose the final beneficiaries of the trust. In a power of appointment trust arrangement, the first spouse to die leaves the surviving spouse the income from the trust property for life and the power to decide how to distribute the trust property during the surviving spouseís lifetime or upon his or her death.
A power of appointment trust should not be used by a spouse that wants to control how his or her estate is distributed. For example, if you have children from a prior marriage or relationship, wish to leave a charitable bequest to your alma mater or a favorite charity, or want to ensure a specific bequest is made to your grandchildren or other heirs, do not place that property in a general power of appointment trust for your spouse. A power of appointment trust is also probably not the right estate planning option if you are concerned about your spouse disinheriting an heir.
Although a power of appointment trust is beneficial in certain estate plans, some estates are not large enough to warrant the expenses involved in drafting and managing it. Before creating a power of appointment trust, consult a tax advisor or estate planning lawyer. Gift tax and estate tax issues of the donor and donee should be reviewed when creating a power of appointment trust. A power of appointment trust should only be made after consideration of your entire estate, along with your spouse's estate, and your overall objectives for distributing your property.
How Do Power of Appointment Trusts Work?
A power of appointment trust can be structured in a number of different ways. A general power of appointment trust can be created by both spouses to place property in trust to be held for the benefit of the other spouse. The trust is revocable until the death of the first spouse. Upon the first spouseís death, the surviving spouse receives a general power of appointment which gives the surviving spouse discretion to decide how to distribute the property during his life or after his death. Because the surviving spouse has a general power of appointment upon the first spouseís passing, the surviving spouse can bequeath the property to his children, creditors, estate, creditors of his estate, or a charity and the predeceased spouse has no say in how the property is distributed, even though the property placed in the trust belonged to the predeceased spouse.In a general power of appointment trust, all income from the trust must be paid to the surviving spouse no less than once annually. It can be paid more frequently if necessary. The property in the trust may be subject to claims of the surviving spouseís creditors. See creditor claims. The value of property over which one holds a general power of appointment is included in the holderís gross estate, even if the holder does not exercise the general power of appointment. If the general power of appointment was created on or before a certain date, other rules may apply. See Trust Law.
Advantages of a Power of Appointment Trust
1. A power of appointment trust allows a person to ensure his or her spouse will have income for life from the trust.
2. The property in the trust avoids probate upon the death of the donor that created the trust.
3. The property in the trust qualifies for the marital deduction and is not subject to estate taxes upon the death of the first spouse, provided the surviving spouse is a U.S. citizen.
4. A power of appointment trust allows the surviving spouse to determine how the assets in the trust should be distributed rather than requiring the predeceased husband or wife to choose the final beneficiaries.
What is a General Power of Appointment?
In a general power of appointment, a donor grants another individual, called the holder or donee, the power to determine who shall receive the donorís property. A general power of appointment can be exercised in favor of any beneficiary or appointee selected by the holder of the General Power of Appointment.
Tips on Power of Appointment Trusts
The spouse that establishes the power of appointment trust can determine the amount of control to grant the surviving spouse. For example, the spouse can name his or her surviving spouse as trustee with authority to manage trust assets during the surviving spouseís lifetime. Alternatively, the spouse can name another person or entity as trustee, preventing the surviving spouse from having any authority to manage trust assets. Many individuals and families use
trust companies to administer their trusts.When determining what type of authority to grant the surviving spouse, a donor should consider the ability of his or her spouse to manage trust assets, the amount of property that will be placed in trust, the federal and state estate and gift taxes to which the parties may be subject, and the donorís objectives in creating the trust.A general power of appointment trust must give the surviving spouse the right to receive all income from the trust during his or her lifetime.A general power of appointment trust must give the trustee or surviving spouse the right to invade the trust principal in certain circumstances set forth in the trust document.The property in the general power of appointment trust will be subject to estate tax upon the death of the surviving spouse.
Other Types of Estate Planning Trusts
Whether your estate planning objectives include avoiding probate, reducing estate taxes, controlling the timing of inheritances by heirs, maximizing the benefits of life insurance or asset protection from creditors, the best way to achieve these goals may be through estate planning trusts.Because there are so many variations and types of trusts, it is essential to consult an experienced lawyer who can explain the relevant benefits and disadvantages of different types of trusts. Based on what you have read about power of appointment trusts, you may be set on using this in your estate plan. However, there may be an alternative to a power of appointment trust which is better suited to your needs. You may also want to consider using other forms of non-probate transfers to carry out your estate plan. For a list of other types of estate planning trusts, see More About Trusts.