One provision of a Last Will and Testament (“Will”) that is not often talked about is a power of appointment.
What a power of appointment is, and what it can do, is critical to understand.
Because it may be an estate planning tool you wish to use. In the right hands, a power of appointment can make your estate plan run smoothly.
But in the wrong hands, it can be disastrous — thwarting your wishes, causing intense family conflict, and eating up your estate in costly legal fees.
What is a Power of Appointment?
Fundamentally, a power of appointment is a power given by one person (in a Will or trust instrument by the testator/settlor as the case may be) to allow another person the right (i.e., the authority or “power”) to decide who will receive a particular asset or set of assets.
This may sound simple and straightforward, but the situations that can arise out of a power of appointment are not always so simple.
For example, a settlor might give his son a power of appointment to decide who should get the assets of a revocable living trust at the parent’s death. Or a testator may give his spouse a power of appointment to decide who should get certain property after the testator’s death.
What the power of appointment does, essentially, is it allows the person making the Will or trust to put off deciding who will get his/her property and let someone else make that decision.
As might be expected, this can be a good thing or it can cause family strife and conflict.
It all depends on who has the power and what they do with it.
For example, a settlor of a trust may give his son a general power of appointment to decide who among his children should get the trust assets including the trust principle after the settlor’s death. As will be seen below, a general power of appointment allows the holder to appoint the assets to others or even to himself. If the son is honest and trustworthy, the power will be used to enhance the father’s estate plan. If not, the son could simply appoint himself to get everything —thwarting the father’s intent, causing family conflict, and no doubt drawing a lawsuit into the bargain.
Types of Powers of Appointment
Florida has 2 types of powers of appointment:
- General power of appointment, and
- The more limited “special” power of appointment
A general power of appointment gives the holder of the appointment the power to appoint estate assets to himself, to his estate, to his creditors, or to creditors of his estate.
A special or nongeneral power of appointment, on the other hand, gives the holder less flexibility. The holder of a special power of appointment cannot appoint the assets to himself/herself. Rather, he/she must appoint them to either a limited class of people (specified in the estate plan) or for limited purposes (e.g., health, education or maintenance of a beneficiary).
Second marriages can cause problems when it comes to powers of appointment. For example, a surviving spouse might be given a power of appointment and might use it to disinherit the decedent’s children or grandchildren by using it to favor his/her own children/grandchildren. Not surprisingly, situations like this do occur and when they do, litigation often follows.
Should You Use a Power of Appointment?
So, if they can be abused by the holder of the power, are powers of appointment a bad idea?
There are a number of reasons to use a power of appointment. Tax considerations are a big reason for using a power of appointment.
Beneficiary protection is another. For example, if grandchild has creditors or a drug addiction, it might be better to allow his/her parent to decide when and how much of a grandparent’s assets the child should receive, rather than leave money to the child outright or to completely disinherit him/her.
Powers of appointment may not be a household word, but they can be very useful in a properly drafted estate plan. If you have any questions or would like to learn more, please contact an experienced estate and probate lawyer.
Customized Estate Plans in Plantation, Florida That Protect You and Your Family
If you have estate planning needs, protecting your family is just one phone call away. At the Law Offices of Samantha J. Fitzgerald, we create estate plans as individualized as you are. We expertly guide individuals through the complex probate process, and capably handle all aspects of the creation, administration, and settlement of trusts as well. Connect with us on Facebook or Instagram or call us at 954-580-3690.