When you give a gift to someone in trust, you get to decide who benefits from that gift after the initial beneficiary’s death, if there are still assets in the trust, but you do not have to. Another option is creating a power of appointment.
What is a Power of Appointment?
You can choose to allow the person you are leaving the gift to decide who should receive the remainder of their gift on their death. This is an example of a “power of appointment.” It allows you to let someone else designate the recipient(s) of your gift. The document creating the power of appointment, typically a will or trust, determines how it must be exercised. It could be exercised by any signed writing, or it could be required to be included in the power holder’s will.
The power of appointment you create can be “general” or “limited.” Let’s assume you are leaving a gift to your child in trust. You can create a power of appointment for your child to decide where the remainder of the trust goes on their death. A general one would allow your child to leave the remainder of their trust to anyone they choose. This could include their spouse, their children or a charity. A limited one places conditions on who your child can leave the remainder to. It could require that your child leave the remainder to their children. The purpose of a power of appointment in that context would be to let your child determine the shares each of their children receives. Whether you make it limited or general, it gives the power holder some control.
What happens if it is not exercised?
However, a power of appointment does not need to be exercised. Therefore, you still need to decide what should happen the power holder does not exercise it. The remainder beneficiaries you select might be the other beneficiaries of your estate, but they do not need to be. It could be anyone you want. Or you could select whoever you think the power holder would choose if they did exercise it.
Should you create one?
Maybe. It really depends on your intention behind the gift you are making. A power of appointment allows you to give your beneficiary some additional ownership of their gift.
Of course, if you know that you want the remainder of your child’s trust to go to their children in equal shares on their death, you can and should do that. But note that you will be giving up some flexibility for your child to adapt to circumstances that might occur after your death.
