Powers of Appointment: A Flexible Estate Planning Tool You Should Know About
When it comes to estate planning, flexibility is key. Life changes, families evolve, and tax laws shift—sometimes overnight. That’s why one tool we consider for our clients who want to keep options open for future generations is the Power of Appointment.
So what is it?
A Power of Appointment is a provision in your will or trust that allows someone else (often a trusted loved one or advisor) to decide who gets certain assets and how. Think of it like giving someone a steering wheel—but only for a specific part of your estate, and only within the rules you set.
There are two main types:
- General Power of Appointment: This grants broad authority—can even let the person appoint assets to themselves or their creditors for example. But watch out: this often brings estate tax consequences by pulling those assets into the powerholder’s taxable estate.
- Limited (or Special) Power of Appointment: More restricted—typically limits choices to a certain class of beneficiaries (like your children or charities) for example. This is the safer route for avoiding unintended tax burdens.
Here’s the catch: the wording matters—a lot. If the language in your estate documents is too open-ended, the IRS might treat the assets as if they belong to the powerholder, and that can create an unexpected tax bill down the road for the powerholder.
Even if your estate isn’t taxable today, tax laws are always changing. What’s exempt now might not be in the future. That’s why it pays to work with an estate planning attorney who knows how to draft powers of appointment that balance control, flexibility, and tax protection.
Bottom line: Powers of appointment can be a smart, strategic way to build flexibility into your estate plan—just make sure they’re done right.