Add estate planning flexibility with a power of appointment

Power of Appointment in Estate Planning

Even the most well-laid plans can go wrong. Events may occur after your death that you did not anticipate or could not reasonably foresee. Unfortunately, there’s no way to know what the future holds. Still, you might wish to add a trust provision to your existing estate plan that gives a specified beneficiary “power of appointment” over some or all of the trust property. Essentially, this person will have the authority to adjust trust disbursements and potentially add or remove beneficiaries.

Suppose the person in charge of this power performs their tasks appropriately. In that case, they can make informed decisions once all the facts are available, which may provide your estate plan with additional flexibility and adaptability.

Power of appointment

There are two types of powers of appointment:

  1. General. The bearer of a general power of appointment can distribute assets to anybody. That includes himself, his estate, or the estate’s creditors. The property is typically held in trust, although it can be delivered directly to the holder. You can also transfer this power of appointment to someone else.
  2. Limited or special. In this case, the person with the power of appointment might give the property to a specified group of people named by the deceased. For example, it could provide that a surviving spouse can bequeath property to their surviving children but not to anybody else. As a result, this is more limited than the general type.

Your circumstances and expectations will determine whether you should employ a broad or limited power of appointment.

Tax impacts 

The tax consequences may influence your decision to utilize the general or limited option. For example, property subject to a general power of appointment is usually included in the taxable estate of the designated bearer of the power. However, the requirements are complex. Property in a deceased person’s estate, on the other hand, is currently given a step-up in basis to fair market value on the date of death. As a result, your heirs can sell property covered by a general power of appointment with little or no tax repercussions.

The holder’s estate, on the other hand, does not include property protected by limited power. Instead, the heirs inherit the property with a carryover basis but no step-up basis. As a result, heirs who sell appreciated property may be subject to substantial capital gains taxes.

A general power of appointment may be of interest if the estate tax isn’t an issue. We can assist you in determining whether or not it is appropriate in your situation. Contact our RRBB accountants and advisors for more information.

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