Power of Appointment: Your Estate Planning Secret Weapon

Power of appointment FAQs

What is a power of appointment and how does it work?

A power of appointment is a legal tool that lets you give someone you trust the ability to decide where your assets go after you die. You (the "donor") name a trusted person (the "holder") in your will or trust. When you die, this person can look at your family's situation and decide whether to stick with your original plan or redirect some assets to different people. The holder doesn't have to use this power; it's completely optional. If they don't make any changes, your assets will go to whoever you originally named in your will.

What's the difference between a general and limited power of appointment?

A general power of appointment gives the holder complete freedom to redirect your assets to anyone they want, including themselves. A limited power of appointment restricts who can receive the assets to a specific group you choose. Most people choose limited powers because they want some control over where their money goes. 

How do powers of appointment affect taxes?

The tax impact depends on whether you create a general or limited power of appointment. If you give someone a general power of appointment, the assets count as part of their estate for tax purposes, even if they never use the power. Limited powers of appointment avoid this problem. The assets don't count toward the holder's estate taxes, so there's no extra tax burden on them. Most families choose limited powers to avoid the estate tax issues, especially when the holder already has a large estate.

When should I consider using a power of appointment in my estate plan?

You should consider a power of appointment when you're concerned about how your family's situation could change over the years. This flexibility is particularly valuable for parents with young kids. You can name your spouse as the holder, knowing they'll be able to assess each child's situation decades later and make smart decisions about who gets what. It's like having a safety net that adapts to whatever life throws at your family.

How is a power of appointment different from a power of attorney?

A power of appointment and power of attorney work at completely different times and serve different purposes. A power of attorney helps you while you're alive, while a power of appointment only works after you die. You might have both in your estate plan—a power of attorney to help while you're alive, and powers of appointment to add flexibility after you're gone.

What mistakes should I avoid when setting up a power of appointment?

The biggest mistake is using unclear language that accidentally creates a general power when you want a limited one, so be very specific about to whom the holder can give assets. Choose your holder carefully and clearly state any restrictions, like "only for education and medical expenses" if that's what you want. Consider naming a backup holder in case your first choice can't serve. Make sure your lawyer drafts the documents correctly and follows your state's rules. Poor drafting has led to expensive court battles where families had to ask judges to fix mistakes in the documents.

Can a power of appointment be changed or canceled after it's created?

Yes, you can change or cancel a power of appointment anytime while you're alive, as long as you're mentally capable of making decisions. Once you die, however, the power becomes permanent and can't be changed.