{Read in 5 Minutes} As a Trusts and Estates attorney, I frequently create estate plans for people. This may include Wills, Powers of Attorney, Health Care Proxies, Living Wills, and Funeral Directives. Sometimes, when I create an estate plan, I think it is essential to review all the assets and property rights that a client has to ensure that any Will that I draft for them addresses this completely.
A Power of Appointment is an interesting concept in estate planning. The name may sound familiar (perhaps like a Power of Attorney) but it is an entirely different thing. A Power of Appointment is an individual’s ability to name, or change, a beneficiary designation, either in their estate plan or someone else’s.
Let me give you some examples of this to illustrate:
- In the person’s estate plan.
Sometimes people will create an estate plan that includes an ongoing Trust for someone. This might include a Trust for the benefit of a surviving spouse, minor children, a party with a disability, or even pets.
Within this Trust (whether it is in their Will, or in a Trust they create during their lifetime), they may reserve the ability to change the beneficiary. This might be beneficial if they do not know the needs of the beneficiary. For example, I may be a parent with young children at home and I write an irrevocable trust that pays to my children upon my eventual death. If my children are all relatively young when I draft it, I may not have a sense of whether they are spenders or savers or would be good at handling money. I might want to retain a Power of Appointment. That means that later, either in a separate writing or perhaps in my own Will, I can change it, so instead of it going to my children outright at a certain age, I can delay it until an age that I think is more appropriate. If by the time they are 25, the child is not developing or is not demonstrating any financial maturity or understanding, I might want to keep it in trust for them until they are 40.
- Powers of Appointment in someone else’s estate plan.
Perhaps I am the beneficiary of a Trust that my parents or grandparents set up years ago. A lot of times when parents or grandparents do that, they create default beneficiaries. For example, after my death, it would go to my children and after their death, it might go to my grandchildren, creating dynastic wealth, etc.
The reason they do this is they do not know who everyone in the family will be as this Trust could potentially go on for decades.
A lot of times when drafting a Trust like that, the person will give the beneficiary the right to exercise a Power of Appointment to change the beneficiaries. For example, in a hypothetical Trust that my grandparents created for me that provides me with income and financial support for my life, I may have the right to say who gets the money after I die. It might be my children, or if I don’t have children, I might choose to leave it to a spouse or another family member, or a charitable organization.
Or perhaps I do have children, but one of my children has a disability and I want to make sure that it goes into a Supplemental Needs Trust to ensure that they will continue to be enrolled in needs-based government entitlements, such as Medicaid or SSI if they are dependent upon that for their care.
That can be a very powerful tool, and it’s something I should discuss with my Trust and Estates attorney when writing a Will.
It’s always important for attorneys and clients to discuss whether Powers of Appointment exist. Not every attorney will ask about this, and not every client will think to bring it up. Sometimes the client doesn’t even know that they are the holder of this Power of Appointment. As an attorney, I always ask my clients, “Are you a beneficiary of an existing Trust?” And if they are, I will ask to see a copy of the Trust Agreement so that I can identify if they have a Power of Appointment. This will make sure that we are addressing all the client’s legal needs when creating an estate plan.
For more information on this topic, please contact me.