New York Estate Planning News - Find a NY Estate Attorney

Understanding Estate Planning: Powers of Appointment

You’ve heard of powers of attorney, but what exactly is a power of appointment?

A power of appointment is an important concept in estate planning. It’s used quite often in trusts— revocable and irrevocable. It is essentially the power to appoint trust property.

A quick example: You form a revocable trust and the trust contains a provision that allows for a third party (Mrs. X) to withdraw or consume trust property for herself or for the benefit of another.

It’s a legal right over trust property, allowing someone else to distribute the trust property in the manner described. A key element of a power of appointment is the ability to affect the beneficial interest on the trust property, (i.e., the enjoyment of the trust property).

There are two main types of powers of appointment: a general power and a limited power.

The general power doesn’t place restrictions on the person holding the power. The limited power places restrictions on who can get the distributions.

The difference might seem simple, on the surface. On a deeper level, the difference between a general and limited power of attorney has tax consequences.

The tax rules for powers of appointment focus on the distinction between the general power of appointment and the limited power of appointment. All property subject to a general power of appointment is brought back into the estate at the time of death and is subject to estate tax.

Similarly, if a holder of a general power of appointment exercises that power in favor of another person, then the gift tax is triggered on the amount that was transferred.

We won’t get into the technicalities of the limited power of appointment here, but it’s fair to say that the limited power of appointment provides more opportunity to save on estate tax and gift tax.

These are complicated estate planning topics, but a good estate planner should be able to guide you well on these issues.

Related Resources: