Powerful Estate Planning With the Use of Powers Of Appointment

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Estate Planning Attorney

Have you ever heard the term “Power of Appointment”? It’s an important concept in estate planning for a number of reasons. A power of appointment (“POA”) is the power given to someone to allow that person to designate who will receive property or an interest in property in the future and/or upon death. The creator of the power is called the donor, the individual having the power is called the powerholder, and the possible recipients of the property are often called the “beneficiaries”.

Powers of appointment are used in estate planning in many ways. The powerholder may hold the power as a fiduciary (an example is a trustee for a trust) or in a nonfiduciary capacity, meaning for his or her own personal benefit. The power may be exercised by the powerholder immediately or only in the future, such as in a Last Will or Trust. The powerholder may or may not be the person who created the power to begin with, namely the trust maker or testator of the Will. There may be multiple powerholders who must act jointly to effectuate the terms of the power.

The persons who can benefit from a POA can be unlimited. They can include the powerholder (sometimes called a general power of appointment), or may be limited to an identifiable class, for example children or grandchildren of the grantor. The benefits of holding a POA or being the object of a POA can also be limited or unlimited.

The trustee of a trust, a common type of powerholder, may be given discretion to invade principal to provide a lifetime income benefit to a beneficiary or for some other person, or he/she may be given discretion to pay income and principal to a named beneficiary, or discretion to allocate income or principal among a defined group of beneficiaries.

In short, the discretion given to the trustee gives the trustee the power to designate beneficial interests in the trust property as future developments indicate. This discretion in the powerholder underscores the primary advantage of using powers of appointment—they provide flexibility to adjust an estate plan to deal with circumstances that may arise years, or even decades, after the estate plan is created. The flip side to this flexibility is the power of appointment’s main disadvantage for some—it means that the donor must give up some control over the ultimate disposition of assets in the estate.

There are other potential ramifications for powers of appointment that should be taken into account. For example, assets subject to a general power of appointment will be included in the estate of the powerholder, which could create unfavorable tax consequences. In addition, an improperly exercised limited power of appointment may become a general power of appointment under the law and subject the POA to inclusion in the gross taxable estate of the holder. All in all, whether to use a power of appointment and, if so, what characteristics, are questions best answered with the advice of a lawyer well versed in estate planning.

To discuss your NJ estate planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.