Power of Appointment

A power of appointment (POA) gives its holder, called the "powerholder," the authority to redirect trust property to other people or entities, either during life (an inter vivos power) or through a will (a testamentary power). The person who created the power is the "donor," and the potential recipients are "appointees." POAs are a primary tool for building flexibility into long-term trusts, allowing a future generation to adapt a trust's distribution plan to circumstances the original grantor could not foresee.

Tax treatment hinges on whether the power is "general" or "limited." A general power of appointment, one that lets the holder appoint assets to herself, her estate, or her creditors, causes the trust assets to be included in her taxable estate. A limited (or special) power excludes the holder and her estate as appointees, keeping assets outside her estate. A hypothetical grantor might intentionally give a child a limited POA so that child can redirect assets among grandchildren without an estate tax consequence.

A common confusion is assuming the powerholder owns the assets. She does not; she merely controls their destination within the boundaries the donor set. Another confusion: failing to exercise a POA is itself a choice. Assets then pass under the trust's "default" provisions, which may or may not align with the family's current wishes. A qualified attorney should draft POA provisions with both tax and non-tax goals clearly in mind.