Power of Appointment Trust: Quick Overview

What is a power of appointment trust?

A power of appointment or power of appointment trust is a legally binding provision contained in a trust which gives a surviving spouse or other beneficiary the authority to change the ultimate beneficiaries of a trust. For example, if a married couple’s trust contains power of appointment language, then after one spouse passes away the surviving spouse has authority to change the trust, beneficiaries, and heirs named in the trust, consistent with the specific terms contained in that power of appointment.

Difference between power of appointment trust and a power of attorney

power of appointment trust is very different from a power of attorney, though both terms can sound similar. A power of appointment trust deals with how assets in a trust are distributed after someone passes away. It gives the surviving spouse or beneficiary authority to redirect or reassign trust property within limits defined in the trust document.

In contrast, a power of attorney is a legal document that allows one person (the agent) to act on behalf of another person (the principal) while the principal is still alive. Powers of attorney are often used to manage finances, healthcare, or legal matters during the principal’s lifetime, particularly if they become incapacitated. Unlike a power of appointment trust, a power of attorney ends at death.

Advantages of a power of appointment trust

There are several advantages to creating a power of appointment trust:

• Flexibility for the surviving spouse or beneficiaries – It allows them to adjust distributions after death to meet changing family needs.
• Protection against outdated estate plans – If circumstances change after one spouse’s death, the surviving spouse can realign the plan.
• Avoids probate – Because the trust already governs the assets, the estate can often avoid probate court, saving time and costs.
• Efficient tax planning – Powers of appointment can sometimes be structured to minimize estate and gift tax consequences.

When is a power of appointment a good idea?

The primary intent of a power of appointment trust is to plan for maximum flexibility for the surviving spouse and/or beneficiaries by giving him/her/them the authority to determine how a trust will be distributed after the decedent has passed.

Disadvantages of a power of appointment trust

Despite its benefits, a power of appointment trust may not be the best fit in all cases. Potential disadvantages include:

• Risk of disinheriting children – In blended families, a surviving spouse with broad powers might exclude stepchildren or favor new beneficiaries.
• Potential for family disputes – Disagreements among heirs can arise if one beneficiary changes what the deceased originally intended.
• Loss of predictability – Since the surviving spouse can alter beneficiaries, the original estate plan may not be honored exactly as written.
• Limited protection for certain assets – If there is significant wealth or complicated holdings, a more controlled trust or estate plan may be a better solution.

When is power of appointment trust a bad idea?

Typically, a power of appointment can cause problems if either spouse has been previously married and has children from that marriage. This can create situations where a child of a deceased spouse is disinherited by the surviving spouse. Additionally, any situation in which spouses already disagree on how to distribute the estate makes this type of trust not ideal. For example, if one spouse favors donating a large portion of the estate to a charity of their choice, while the other spouse is not as charitably inclined.

What is a limited power of appointment or special power of appointment?

A limited power of appointment, otherwise known as a special power of appointment, gives a surviving spouse or other beneficiary the ability to give the decedent’s assets to a select group of people specifically identified in the power of attorney. For example, a special power of appointment may give a surviving spouse the ability to give the assets to some or any of the decedent’s surviving children, as the surviving spouse my choose, but not to anyone else. Importantly, a limited power of appointment or special power of appointment cannot be used to benefit the decedent, his/her estate, or his/her creditors.

What is a general power of appointment?

A general power of appointment allows the holder of that power the ability to appoint those assets for the benefit of anyone, include the decedent, his/her estate, and/or his/her creditors. .

How do I set up a power of appointment trust?

A power of appointment should be drafted by an estate planning attorney as part of a comprehensive estate plan that includes will, trust, power of attorney, and healthcare directive documents.

Can I dispute a power of appointment trust?

Yes. Power of appointment trusts can be challenged under certain circumstances, particularly where undue influence or lack of capacity may be at issue. Trust disputes are more common than most people think. At RMO Lawyers, we protect people like you everyday. For a free consultation, contact us anytime at (424) 320-9444