Powers Of Appointment

Use and Purpose

The power of appointment (POA) over property is the right of the holder of the power to specify who will be the recipient of
the enjoyment and use of the property subject to the power.
There are three primary terms associated with the POA:
1) Appointee Property recipient
2) Donor Grantor of power over property
3) Donee The holder of the power
General and Special (Limited) Powers
The "powers" are classified as either "General" or "Special" powers. If the holder can exercise their power without any
restrictions or conditions attached, then the power is a general power. Under a special or "limited" power, the holder can only
exercise their power under certain conditions, limited periods of time or for specific beneficiaries.
Gross Estate Inclusion:
1) General Powers - YES
2) Special Powers NO
General Power:
Unlimited right to appoint property to:
Special or Limited Power:
Property may not be appointed to:

YOURSELF
YOUR CREDITORS
YOUR ESTATE
YOUR ESTATE CREDITORS

Property passing under general power of appointment

[
Sec. 85(D), NIRC
]
Power of appointment
refers to the right to designate the person or persons who will succeed to the property of the prior decedent.
When general.

The power of appointment is

general
when the power of appointment authorizes the donee of the power to appoint any person he pleases. The power may be
exercised in favor of anybody including the done-decedent. The donee of a general power of appointment holds the
appointed property with all the attributes of ownership, and, thus, the appointed property shall form part of the gross estate
of the donee of the power upon his death.
When special.

Special power of appointment

exists when the done can appoint only from a restricted or designated class of persons other than himself. Property
transferred under a special power of appointment should be excluded from the gross estate of the donee of the power
because the done-decedent only holds the property in trust. Gross estate shall include any property passed or transferred
under a
general
power of appointment exercised by the decedent:
(1)By will, or
(2)By deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3)
By deed under which he has retained (for his life or any period not ascertainable without reference to his death or for any
period which does not in fact end before his death):
(a)the possession or enjoyment of, or the right to the income from, the property, or
b)the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property
or the income therefrom [Sec. 85(D), NIRC
].
Exception:Bona fide
sale for an adequate and full consideration.
Two kinds of appointment and their effects.

General Special
As to nature.

DONEE has power to appoint any person he chooses who shall possess or enjoy the property without restriction DONEE must
appoint successor to the property only within a limited group or class of persons
As to tax implications.


Makes appointed property, for all legal intents, the property of the DONEE
(
includible
in his estate)
Not includible
in the gross estate of the DONEE when he dies
As to effects.

DONEE holds the appointed property with all the attributes of ownership, under the concept of owner DONEE holds the
appointed property in trust, or under the concept of trustee
http://www.law.cornell.edu/cfr/text/26/20.2041-1

(b) Definition of power of appointment

(1) In general. The term power of appointment includes all powers which are in substance and effect powers
of appointment regardless of the nomenclature used in creating the power and regardless of local property law
connotations. For example, if a trust instrument provides that the beneficiary may appropriate or consume the
principal of the trust, the power to consume or appropriate is a power of appointment. Similarly, a power given
to a decedent to affect the beneficial enjoyment of trust property or its income by altering, amending, or
revoking the trust instrument or terminating the trust is a power of appointment. If the community property
laws of a State confer upon the wife a power of testamentary disposition over property in which she does not
have a vested interest she is considered as having a power of appointment. A power in a donee to remove or
discharge a trustee and appoint himself may be a power of appointment. For example, if under the terms of a
trust instrument, the trustee or his successor has the power to appoint the principal of the trust for the benefit
of individuals including himself, and the decedent has the unrestricted power to remove or discharge the trustee
at any time and appoint any other person including himself, the decedent is considered as having a power of
appointment. However, the decedent is not considered to have a power of appointment if he only had the power
to appoint a successor, including himself, under limited conditions which did not exist at the time of his death,
without an accompanying unrestricted power of removal. Similarly, a power to amend only the administrative
provisions of a trust instrument, which cannot substantially affect the beneficial enjoyment of the trust property
or income, is not a power of appointment. The mere power of management, investment, custody of assets, or
the power to allocate receipts and disbursements as between income and principal, exercisable in a fiduciary
capacity, whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as
an incidental consequence of the discharge of such fiduciary duties is not a power of appointment. Further, the
right in a beneficiary of a trust to assent to a periodic accounting, thereby relieving the trustee from further
accountability, is not a power of appointment if the right of assent does not consist of any power or right to
enlarge or shift the beneficial interest of any beneficiary therein.

(c) Definition of general power of appointment

(1) In general. The term general power of appointment as defined in section 2041(b)(1) means
any power of appointment exercisable in favor of the decedent, his estate, his creditors, or the
creditors of his estate, except (i) joint powers, to the extent provided in 20.2041-2 and 20.20413, and (ii) certain powers limited by an ascertainable standard, to the extent provided in
subparagraph (2) of this paragraph. A power of appointment exercisable to meet the estate tax, or
any other taxes, debts, or charges which are enforceable against the estate, is included within the
meaning of a power of appointment exercisable in favor of the decedent's estate, his creditors, or the
creditors of his estate. A power of appointment exercisable for the purpose of discharging a legal
obligation of the decedent or for his pecuniary benefit is considered a power of appointment
exercisable in favor of the decedent or his creditors. However, for purposes of 20.2041-1 to
20.2041-3, a power of appointment not otherwise considered to be a general power of appointment
is not treated as a general power of appointment merely by reason of the fact that an appointee may,

in fact, be a creditor of the decedent or his estate. A power of appointment is not a general power if
by its terms it is either
(a) Exercisable only in favor of one or more designated persons or classes other than the decedent or
his creditors, or the decedent's estate or the creditors of his estate, or
(b) Expressly not exercisable in favor of the decedent or his creditors, or the decedent's estate or the
creditors of his estate.
A decedent may have two powers under the same instrument, one of which is a general power of
appointment and the other of which is not. For example, a beneficiary may have a power to withdraw
trust corpus during his life, and a testamentary power to appoint the corpus among his descendants.
The testamentary power is not a general power of appointment.
Example (1).
A created a revocable trust before October 22, 1942, providing for payment of income to B for life
with remainder as B shall appoint by will. Even though A dies after October 21, 1942, without having
exercised his power of revocation, B's power of appointment is considered a power created before
October 22, 1942.
Example (2).
C created an irrevocable inter vivos trust before October 22, 1942, naming T as trustee and providing
for payment of income to D for life with remainder to E. T was given the power to pay corpus to D
and the power to appoint a successor trustee. If T resigns after October 21, 1942, and appoints D as
successor trustee, D is considered to have a power of appointment created before October 22, 1942.
Example (3).
F created an irrevocable inter vivos trust before October 22, 1942, providing for payment of income
to G for life with remainder as G shall appoint by will, but in default of appointment income to H for
life with remainder as H shall appoint by will. If G died after October 21, 1942, without having
exercised his power of appointment, H's power of appointment is considered a power created before
October 22, 1942, even though it was only a contingent interest until G's death.
Example (4).
If in example (3) above G had exercised his power of appointment by creating a similar power in J,
J's power of appointment would be considered a power created after October 21, 1942.
http://www.poynerspruill.com/publications/Pages/UsingPowersofAppointmentandOtherPowersinTruststoAddFlexibilityandRedu
ceTransferTaxes.aspx
Historically, estate planning attorneys have used trusts to eliminate or reduce transfer taxes for their clients and their families, and/or to address a clients
non-tax concerns for his or her beneficiaries, and trusts will continue to be used to address these tax and non-tax concerns. However, in light of the
significant tax and non-tax uncertainty our clients and their families will likely face in the future, it is critical for us as estate planning attorneys to draft our
clients trusts with provisions that are flexible enough to deal with this greater uncertainty. Through the use of powers of appointment granted to trust
beneficiaries, limited trust beneficiary powers of withdrawal, and trustee termination provisions, clients can accomplish their goal of preserving their
wealth for their family while at the same time giving persons whom they trust the ability to make changes to the trusts plan of distribution in order to deal
with future changes in the transfer tax laws or the circumstances of a clients family.
A. Powers of Appointment.

Where a client will be establishing trusts for his or her family, prudent estate planning requires that the estate planning attorney consider at the outset of
the engagement whether powers of appointment should be incorporated into the clients trusts. The estate planning attorney should discuss in the initial
meeting with the client the advantages and disadvantages of giving powers of appointment to the beneficiaries of the trusts to add flexibility from both a
tax and non-tax standpoint. Although it may be somewhat difficult to explain to a client the complexities of a testamentary special (or general) power of
appointment, clients appreciate an estate planning attorney who is thorough and who can give the client more options when it comes to the clients
disposition of his or her estate.
In situations where a generation-skipping transfer may occur upon the termination of a trust that might result in the imposition of GST tax, powers of
appointment should be incorporated in the trust in order to eliminate these GST taxes. For example, often clients create trusts (either during the clients
lifetime or at the clients death) for their children until the children reach some age in adulthood (for example, until age 40). If the child lives until age 40
and receives all of the assets in the trust at that time, there is, of course, no generation-skipping transfer. However, if the child dies before the trust
terminates at age 40 and the terms of the trust provide in such event that the deceased childs children are to receive the trust assets, then the
distribution of those assets to the deceased childs children will constitute a taxable termination under I.R.C. Section 2612, and if the trust has not be
exempted from the GST tax by the allocation of the clients GST exemption (either because the client had allocated all his GST exemption to other trusts
he created, or he did not have enough GST tax exemption available to allocate GST exemption to all of his trusts), then the taxable termination will result
in the assessment of GST taxes which could consume a substantial portion of the assets in the trust. This result can be avoided, however, by giving a
child a testamentary general power of appointment over the assets in the trust which would cause the trust to be includible in the deceased childs estate
under I.R.C. Section 2041 for estate tax purposes, therefore making the deceased child the transferor under I.R.C. Section 2652 (a) of the trust property
for GST tax purposes. Since the deceased child is considered the transferor for GST tax purposes because of the childs testamentary general power of
appointment over the trust, the distribution of the trust assets to the deceased childs children at the childs death is not considered a generation-skipping
transfer. Often, the child will not have a substantial estate, and with the larger estate tax exemptions that we have now (and hopefully will be in
existence going forward), the inclusion of the trust in the deceased childs estate for estate tax purposes will result in no estate taxes in the childs estate
and therefore the property in the trust will pass to the childs children without any additional transfer taxes.
This possible inadvertent GST tax issue can arise in multiple situations, such as in irrevocable trusts established by a client during his or her lifetime (for
example, trusts created for a clients children under an irrevocable life insurance trust or under an irrevocable trust created by a client as a vehicle for
making gifts to the clients children). Often, the client does not choose to allocate any of his GST tax exemption to these trusts since it is more likely than
not that the child will survive until the time he or she reaches the designated trust termination age, and the client prefers to preserve his or her GST tax
exemption for trusts that will be created at the clients death that will have intentional generation-skipping transfers.
To deal with this possible adverse transfer tax consequence, the estate planning attorney should include the following power of appointment language in
the childs trust:
Distribution Upon Death of Child. Upon the death of the child before receiving or withdrawing his or her entire trust, the remaining principal, as then
constituted, and all accrued or undistributed income of the childs trust shall:
i. With respect to any portion of such trust which may be exempt for purposes of the generation-skipping transfer tax, or with respect to which said tax
is not applicable, be distributed by the Trustee to such of the childs issue, in such amounts or proportions, either outright or in trust, as the child may
have appointed by specific reference to this power in the childs Will.
ii. With respect to any portion of such trust which may be nonexempt for purposes of the generation-skipping transfer tax and with respect to which a
generation-skipping transfer would occur but for the existence of this power of appointment, be distributed by the Trustee to such appointee or
appointees, including the childs estate, in such amounts or proportions, either outright or in trust, as the child may have appointed by specific reference
to this power in the childs Will.
The Trustee is authorized to rely, and is relieved of liability in so relying, upon any instrument admitted to probate in common or solemn form as the Will
of the child. If no instrument is admitted to probate within sixty (60) days after the death of the child, the Trustee may assume that the child died
intestate and shall be protected in acting in accordance with such assumption.
If any power of appointment hereunder is not effectively or fully exercised, principal of the childs trust in an amount sufficient to pay all additional death
taxes incurred by the inclusion of this trust in the gross estate of the child, if any, shall be paid to, or upon the order of, the personal representative of the
childs estate upon receipt of written request from the childs personal representative. For purposes of this Subparagraph, such additional death
taxes shall mean the excess of (1) all estate, inheritance, and other death taxes computed on the childs taxable estate over (2) the amount of such
taxes computed on the childs taxable estate that would have been imposed if no portion of this trust had been included in the childs gross estate. To
whatever extent such property is not effectively appointed by the child, or paid as provided above, the same shall be paid over and distributed to the
childs then living issue, per stirpes, subject to the provisions hereinafter made for holdback trusts for beneficiaries under the age of thirty (30) years.
It should be noted that the above language only gives the child a general power of appointment if it is necessary to avoid the imposition of GST tax on
the trust upon the death of the child. If the distribution of the childs trust at the childs death does not constitute a generation-skipping transfer (perhaps
because the GST tax has been repealed at some point in the future), or if it does constitute a generation-skipping transfer but is not a taxable transfer

because of the allocation of the parents GST exemption to the trust, then the child can only appoint the trust property to a limited group of beneficiaries
(the childs own issue).
If the parent is concerned about giving the child the broadest possible general power of appointment, then the permissible appointees of the childs
general power of appointment can be limited to the creditors of the childs estate.
It should also be noted that the above language also provides that any estate taxes caused by the inclusion of the trust property in the childs estate as a
result of the general power of appointment shall be paid from the trust and not from the childs estate. This has the advantage of clarifying exactly how
these estate taxes are to be paid, thereby avoiding any disruption of the childs own estate plan.