Enhancing Estate Planning Flexibility with a Power of Appointment
Posted by Robert Ingrasci on August 08, 2024
Planning for your estate involves anticipating your family’s needs after your death, but unforeseen events can complicate matters. To address this, you can include a power of appointment in your estate plan, allowing a designated beneficiary to adjust trust distributions or modify beneficiaries as needed.
Increasing Flexibility
A power of appointment grants the designated person—typically a surviving spouse or adult child—the authority to adjust the trust’s distribution plan based on current circumstances. This flexibility helps ensure that decisions can be made with the benefit of up-to-date information. For example, if your spouse holds this power, they could decide whether to transfer assets directly to your grandchildren or manage them through a professional trustee.
Types of Powers
There are two primary types of powers of appointment:
- General Power of Appointment: This permits the holder to allocate property to anyone, including themselves, their estate, or creditors. This type of power can be transferred to another person and usually results in the property being included in the holder’s taxable estate.
- Limited (or Special) Power of Appointment: This restricts the holder to distributing property to a defined group, such as surviving children, and excludes others. This power is more restrictive compared to a general power of appointment.
Tax Considerations
The choice between a general and limited power of appointment can have significant tax implications. Property under a general power of appointment is generally included in the holder's taxable estate, allowing for a step-up in basis to the fair market value on the date of death. Consequently, heirs may face minimal income tax when selling such property. Conversely, property under a limited power does not receive a step-up in basis and could result in higher capital gains taxes if sold by heirs.
Consulting with an estate tax advisor is crucial to determine the best approach based on your financial and tax situation. Contact us for assistance with any questions.
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Bob is an experienced tax professional who devotes his professional time to structuring tax strategies in the areas of compliance, consulting, and planning. Bob works closely with a broad range of high-net-worth individuals and multi-generational families, specializing in the areas of gift and estate planning, charitable gift planning, trust and estate administration, individual taxation, and wealth preservation. Bob serves as a practice leader in the Family Wealth and Estate Planning group. Bob joined Lumsden McCormick in 2008 and was named partner in 2022.