Estate planning attorneys know of powers of appointment. They allow the holder to appoint property held in Trust to whom the holder wishes. Powers of appointment can be of two different types, general or limited.
A general power of appointment (GPOA) is one that may be exercised in favor of the holder, the holder’s estate, or the creditors of either. A GPOA causes inclusion in the holder’s taxable estate. As a result, the assets subject to the power get a step-up (or -down) in basis at the death of the holder. A limited power of appointment (LPOA) is a power that may be exercised in favor of whomever the power designates, as long as it may not be exercised in favor of the holder, the holder’s estate, or the creditors of either. So, a LPOA may be exercisable in favor of a very broad class, including billions of people, as long as it may not be exercised in favor of those prohibited groups. A LPOA does not cause inclusion in the holder’s taxable estate and does not cause a step-up (or -down) in basis.
Powers of appointment can add a great deal of flexibility to an estate plan. A LPOA can allow a beneficiary to direct where the assets will go at their death, without being taxed on them. Typically, these are very useful because the beneficiary might have the benefit of much more information prior to their eventual exercise decades later.
However, in the case of any power of appointment, the manner of exercise is critical. The document granting the power can specify exactly how it must be exercised. It could require an exercise during life or at death. It could require exercise by a particular document, like a Will, Trust, or other writing. Whatever time and manner of exercise is required by the document granting the power, that is exactly how it must be exercised to be valid. Also, it is common for the grant of the power to require a specific reference to the power in the exercise.
It is not sufficient that the holder intended to exercise the power. The holder must follow the precise requirements in the grant of the power. See, e.g., Cessac v. Stevens, 127 So. 3d 675 (Fla. Dist .Ct. App. 2013).
Powers of attorney may be very flexible tools in estate planning. If you are exercising one, just make sure you do so exactly as required.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
- Tax Proposals Could Alter Estate Planning Landscape - April 13, 2021
- The Role of the Estate Planning Attorney - April 6, 2021
- Pandemic Relief for Employers - March 30, 2021