Powers of Appointment

Powers of Appointment Estate Planning General Power of Appointment Special Power of Appointment Trusts Wills Property Distribution
Powers of appointment refer to the authority granted to an individual, referred to as the donee or appointee, to designate the distribution of certain property or assets, either held in a trust or as part of an estate. This power can affect estate planning significantly.
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Definition

Powers of appointment, in estate planning, allow one person (the donee) the authority to distribute or decide the disposition of certain property or assets from an estate or trust. This power can be general or special, often specifying the conditions or limitations under which it can be exercised.

  1. General Power of Appointment: Allows the donee to allocate the property to anyone, including themselves, their estate, their creditors, or the creditors of their estate.

  2. Special Power of Appointment: Also known as a limited power of appointment, it restricts the donee’s authority to allocate property only to a defined group of people, excluding themselves, their estate, their creditors, or the creditors of their estate.

Examples

  1. Example of General Power of Appointment: An estate owner might give a beneficiary the authority to distribute specified assets to anyone they choose, including themselves. This could include family members, friends, or creditors.

  2. Example of Special Power of Appointment: A grandparent might give a parent the power to distribute trust assets among their children, excluding the parent themselves from benefiting from the trust.

Frequently Asked Questions (FAQs)

  1. What is the difference between a general and a special power of appointment?

    • A general power of appointment allows the donee to allocate assets to anyone, including themselves, their estate, and their creditors. A special power of appointment restricts the donee to allocate assets only to specific individuals or classes defined by the donor, excluding themselves, their estate, and their creditors.

  2. When do powers of appointment typically come into effect?

    • Powers of appointment most often come into effect upon the death of the donor or at another specified time dictated in the trust or estate document.

  3. Are there tax implications related to powers of appointment?

    • Yes. Assets distributed via a general power of appointment may be included in the donee’s taxable estate, potentially incurring estate taxes. Special powers of appointment, due to their restrictions, often have more favorable tax implications.

  4. Can a power of appointment be revoked?

    • This depends on the terms laid out by the donor in the trust or estate plan. Some powers of appointment are revocable, others are irrevocable.

  5. What happens if the donee does not exercise their power of appointment?

    • If the donee does not exercise their power of appointment, the distribution of assets will be handled according to the terms set forth in the trust or estate plan by the donor.
  • Trust: A fiduciary relationship in which one party, known as the trustee, holds legal title to property for the benefit of another, the beneficiary.
  • Donor: The person who creates a power of appointment by establishing a trust or will.
  • Donee (or appointee): The individual granted the power of appointment, responsible for designating how specified assets will be distributed.
  • Beneficiary: The individual(s) or entity(ies) designated to receive benefits or distributions from a trust or estate.

Online References to Online Resources

  1. Investopedia on General Power of Appointment
  2. American Bar Association (ABA) on Powers of Appointment
  3. Internal Revenue Service (IRS): Understanding Powers of Appointment
  4. Cornell Law School’s Legal Information Institute on Powers of Appointment

Suggested Books for Further Studies

  1. “Estate Planning Basics” by Denis Clifford
  2. “Wills, Trusts, and Estates, Ninth Edition” by Robert H. Sitkoff and Jesse Dukeminier
  3. “The Complete Book of Wills, Estates & Trusts” by Alexander A. Bove Jr. Esq.
  4. “The Tools and Techniques of Estate Planning” by Stephan R. Leimberg and John J. McFadden

Fundamentals of Powers of Appointment: Estate Planning Basics Quiz

### What distinguishes a general power of appointment from a special power of appointment? - [x] A general power allows distributions to anyone including the donee; a special power excludes the donee. - [ ] A general power is only exercisable by the donor; a special power by the donee. - [ ] A special power allows discretionary distributions; a general power does not. - [ ] A general power is nontransferable; a special power is transferable. > **Explanation:** A general power of appointment allows the donee to distribute the property to anyone, including themselves, while a special power restricts distributions to specified individuals, excluding the donee. ### Who typically grants the power of appointment? - [x] The donor or grantor - [ ] The executor - [ ] The beneficiary - [ ] The court > **Explanation:** The power of appointment is typically granted by the donor or grantor when setting up a trust or estate plan. ### What is the primary benefit of a special power of appointment in estate planning? - [ ] It allows the donee to have total control. - [x] It restricts distributions and can provide tax advantages. - [ ] It can be easily modified by the donee. - [ ] It eliminates the need for a will. > **Explanation:** A special power of appointment can restrict distributions, ensuring the donor's wishes are followed and potentially offering favorable tax implications. ### Can a power of appointment affect estate taxes? - [x] Yes, especially with a general power of appointment. - [ ] No, it has no impact on taxes. - [ ] Only if the property is in a different jurisdiction. - [ ] Only if the power is irrevocable. > **Explanation:** A general power of appointment can cause assets to be included in the donee’s taxable estate, affecting estate taxes. ### What happens if a donee does not exercise their power of appointment? - [ ] The power reverts to the state. - [ ] The trust terminates. - [x] The assets are distributed according to the donor's default terms. - [ ] The donee automatically receives the assets. > **Explanation:** If a donee does not exercise their power, the property is usually distributed based on the default instructions left by the donor in the trust or estate plan. ### Who is generally excluded from receiving assets under a special power of appointment? - [ ] The donor - [ ] The executor - [x] The donee and their creditors - [ ] The state > **Explanation:** A special power of appointment excludes the donee, the donee's estate, and the donee's creditors from receiving assets. ### What must a donee consider when distributing assets through a power of appointment? - [ ] Market conditions - [x] The limitations set by the donor - [ ] Public opinion - [ ] State legislation > **Explanation:** A donee must consider and adhere to any limitations or conditions set by the donor when distributing assets via a power of appointment. ### In what document is a power of appointment usually defined? - [ ] In a government registry - [x] In a trust or will - [ ] In a property deed - [ ] In a financial statement > **Explanation:** A power of appointment is typically defined within a trust or will. ### Who can exercise a power of appointment if the donee is incapable or unwilling? - [ ] The state - [x] The trustee or executor - [ ] The donor - [ ] Any beneficiary > **Explanation:** If the donee cannot or does not want to exercise the power, the trustee or executor might distribute the assets based on the donor’s instructions or default conditions. ### What advantage does a donee gain by holding a general power of appointment? - [x] They can distribute assets to themselves or their creditors. - [ ] They can sell the power. - [ ] They can change the trustee. - [ ] They avoid all taxes. > **Explanation:** A general power of appointment gives the donee flexibility to allocate assets to themselves, their estate, or their creditors.

Thank you for exploring powers of appointment and testing your knowledge with our quiz! Continue delving into estate planning to harness these tools effectively.

Wednesday, August 7, 2024
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