Bite-Sized Bits of Knowledge

Hi, welcome back to another dose of Bite-sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today, we’re going to talk about a really important provision of trusts that has relevance to wills. It’s called a power of appointment. So the big picture here is that the power of appointment is a provision that goes into a trust. There’s usually, I would say, two main kinds of powers of appointment. And what it’s doing is it’s allowing other people to exercise a power, typically to designate a different beneficiary than would otherwise be the case in the trust. In the case of what’s called a general power of appointment, a person that you give the power to would have the ability to designate pretty much anybody or any entity to inherit the trust proceed, the balance of the trust upon that beneficiary’s death. That would include the beneficiary themselves, the beneficiary’s estate, the beneficiary’s creditors, and creditors of the beneficiary’s estate. It could mean their neighbor, their spouse, their partner, their friend. It’s pretty broad when it comes to a general power of appointment. In contrast, a limited power of appointment is where you’re limiting the power that the beneficiary has to designate other people or entities to take over that beneficial interest.

So, generally, a limited power appointment would be limited to anybody, any recipient, except those four things I just mentioned, which would be the beneficiary, the beneficiary’s the state, the beneficiary’s creditors, and creditors of the beneficiary’s estate. So a limited power is typically like any other recipient except those four things. So that’s also broad. It’s very It’s common then, as you might expect, to give that power, but even further limited, say, for example, to only family members or only certain amounts. You can do a lot of planning with these powers. They predominantly derive for tax, state tax planning purposes. It’s utilized, I think, as more of a flexibility thing for the trusts, but it’s important to understand what they are and how they can be used. In terms of how you use them, the beneficiary has to be aware of them. They have to be able to exercise them. The way to exercise them is typically in their will. The beneficiary says, In their will, I hereby exercise my power of appointment in Section 123 of Trust ABC, and hereby designate such and such person in such and such amounts to receive my beneficial And that’s how that would be exercised.

So it’s not for everybody. It’s not always used, but it’s something that I think is important to understand. Certainly, if you have one already, it’s in a trust for you, or if you’re planning and you’re trying to create some flexibility because you just don’t know what’s going to happen in the world and your family, your beneficiaries, deep into the future, you can build in some flexibility now. So I hope you found this helpful. Thanks for stopping by and stay tuned for more. Hey, Mo. Hey, Mo, La, Mo-la.