Power of Appointment

What is a power of appointment?  A question that is often asked by individuals and couples when engaged in the process of estate planning, is not as easily answered.

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As defined by the Internal Revenue Code, a “general power of appointment” is a power which can be exercised in favor of the decedent, his estate, his creditors, or the creditors of the estate.”

A power to consume, invade or appropriate property for the benefit of a decedent that is limited by an ascertainable standard – relating to the health, education, support or maintenace of the decedent, is NOT deemed to be a general power of appointment.

In very basic terms, a general power of appointment allows the holder of the power the ability to alter the beneficial enjoyment of the asset (trust or otherwise) by altering, amending or revoking the trust instrument or terminating the trust.  Some control over the property, without discretionary limitation, results in a power of appointment.

Importantly, property that is subject to a general power of appointment is included in the taxable estate of the holder of the power.

A power of appointment usually comes into play with a “living trust,” and is a mechanism by which the Grantor retains control of the trust during his or her lifetime.  

A general power of appointment in the surviving spouse is required in order for a trust to qualify for the marital deduction.

During the process of estate plannng, great care should be taken in drafting instruments granting a general power of appointment, as there can be substantial impact of gift and estate taxes if done incorrectly.


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