Two weeks ago we wrote about powers of appointment, introducing the concept. The basic idea: you can give someone else the power to designate the ultimate recipient of a gift or bequest. We didn’t distinguish between (or describe) general powers of appointment and limited powers of appointment. We saved those concepts for another day. Today.
General powers of appointment
We’ve already established what the power of appointment is about. It gives the recipient of your gift or bequest the authority to designate where it goes on their later death.
But wait. If you leave things to, say, your child (or parent, or neighbor, or anyone) outright, they will own the property. They might not get anything until your death, but if they outlive you the property is theirs. They can do whatever they want to with it.
What if you leave things in trust for your beneficiary? Now you have to make some decisions. If anything is left when your beneficiary dies, where will the remaining assets go? To their children? Maybe to their spouse? As the person establishing this trust, you get to make the decision.
But maybe you’d like to give your beneficiary a lot of flexibility. You could give them a power of appointment — then they can decide where the property ultimately goes. Are you comfortable letting them decide? That’s when general powers of appointment shine.
General powers of appointment can be exercised in favor of (for the moment — we’ll get a little more detail later) anyone, or any organization. And that’s what your power of appointment might say. Imagine something like: “on the death of Dave, the remaining trust assets shall be distributed to any person or entity he might designate in his will” (don’t copy that language, please — we’re trying to stay simple here, not lawyerly).
Limited powers of appointment
Maybe that makes you a little twitchy. You might not want the trust to go to your in-laws, or your child’s spouse’s new spouse and their children (trust us — it’s a thing). Maybe you want to keep the family ranch in the bloodline for as many generations as possible.
Enter the limited power of appointment. Instead of giving your beneficiary carte blanche, you can limit their choices. How? “On the death of Dave, the remaining trust assets shall be distributed to such descendants of mine, or charitable organization, or individual over 2 meters in height, as Dave shall designate in his will.” Again, the language here is intended to be understandable, not legalistic. So you can see: Dave can’t transfer the trust to his spouse or his/her children — unless they are uncommonly tall.
Are there tax considerations?
Of course there are tax considerations. There always are.
Under current income tax law, when you die your assets get a “stepped-up” basis. No one has to pay the capital gains tax on appreciation during your life. But unless Dave has a general power of appointment, at his later death the next round of beneficiaries don’t get a similar stepped-up basis. So there might be an important reason to give your first beneficiaries general powers of appointment. Limited powers of appointment don’t cut it for that purpose.
So is it possible to get the stepped-up basis value from a general power of appointment, but not give the beneficiary too much discretion to make (what you think are) bad decisions about ultimate beneficiaries? For that matter, can you control how your beneficiary exercises their power of appointment? Yes, and yes. But those are topics for another Elder Law Issue.
