What are Powers of Appointment?
Powers of appointment allow you to give agency to future generations regarding how your estate is distributed. Specifically, they allow you to designate certain individuals as decision makers for where specific assets go following your passing. Let me explain using an example:
You have three children. You create a trust and grant your oldest child the ability to choose which grandchildren receive which parts of your tea cup collection. The oldest child has a power of appointment!
The individual granting the power of appointment is called a “donor.” The individual with the power of appointment is called a “donee.” The donee is able to “appoint” people to receive assets from the estate. In practice, this allows you to imbue a trusted individual with the ability to make decisions regarding your assets following your passing. This makes it so that your estate plan can adapt to unforeseeable/unforeseen events that happen after it was drafted and even after you have passed.
Creating Powers of Appointment
Powers of appointment can be created as a part of your estate plan. While the express words “power of appointment” are not required, it must be clear that you, the donor, are intending to create a power of appointment. That is, it must be clear that you are designating someone to appoint recipients of specifically identified property.
Types of Powers of Appointment
Broadly speaking, there are two different types of powers of appointment: general and non-general. There are lots of nuances to each, but here is the basic idea:
General: A general power of appointment allows the donee to allocate the assets in question to themselves, their estate, or their creditors. The main benefit of this is that if you want the donee to be able take some of the assets for themselves, a general power will enable this. However, it is important to note that creditors are able to reach assets held by someone with a general power of appointment.
PROS: Donee can include themselves as a recipient of the assets
CONS: Creditors can reach the assets that are the subject of the power of appointment
Non-General: A non-general power of appointment is one where the donee cannot appoint themselves, their estate, or their creditors as a recipient of the assets. This can be useful when you don't want the donee to receive certain specific assets, but you think they are in the best position to make decisions regarding those specific assets after you have passed.
PROS: Creditors of the donee cannot reach the assets that are the subject of the power of appointment.
CONS: The donee cannot assign assets to themselves, their estate, or their creditors.
Permissible Appointees
You can retain control over the donee's power by specifying “permissible appointees.” In essence, you make a list or designate a category of people (like “all of my grandchildren”) that you want the donee to pick from when deciding where assets should go. To put it a different way, you get to pick what is on the menu, and the donee gets to order items on the menu for you/on your behalf.
Depending on the type of Power of Appointment in your estate plan, the rules regarding who can be a “permissible appointee” vary.
Exercising a Power of Appointment
What if you already have a power of appointment? How do you make sure you're exercising it properly? Well, to ensure everything works as intended, it's best to specifically state the power of appointment that you are exercising and which property you are appointing. However, under certain circumstances, the exercise of a power of appointment can be inferred by a court.
Regardless of whether it is explicitly exercised or the exercise can be inferred, it is critical that the person exercising the power have capacity at the time they exercise the power. You as the donor can also add specific requirements that the donee must comply with to exercise their power. These are called “formalities.”
For instance, some powers of appointment, known as Testamentary Powers of Appointment, are only effective after the donee has passed. They are only able to be exercised by the donee's will. To create one of these testamentary powers, typically there is language in the document creating the power of appointment that specifies that the power must be exercised by the donee's will.
Despite being such an important and useful tool in estate planning, powers of appointment are very complex! There are many more variables, iterations, and nuances that make them tricky to properly implement. This article is just a brief overview of some of the basic concepts of powers of appointment. If you interested in learning more, the professionals at the Holland Law Group are happy to help you understand the best way to use Powers of Appointment in your estate plan!