San Jose Estate Planning Attorney Blog

A power of appointment can be an effective estate planning technique, facilitating how your property may ultimately pass to your heirs.  There are two types of powers of appointment: general & limited. Both of these powers are the same with one exception:  The general power allows the power holder to appoint the property to themself, their estate, their creditors, or the creditors of their estate.  If you grant a general power of appointment, allowing the power holder to appoint to themself, the property will be included in the powerholder's estate for estate tax purposes.

Greatest Benefit of Creating a Power of Appointment

There is one great benefit to granting a power of appointment to the beneficiary of a trust you create:  Flexibility!!!

It is very difficult to know what the future will hold.  What are the needs and wants of the beneficiary in the future. Who is better able to manage the trust assets as they pass to third and fourth generations?  A Power of Appointment can create that flexibility to allow each beneficiary to make the best appropriate decision based on the information they have available rather than mandating a distribution scheme that may be inappropriate in the future.

Reasons to Choose a Limited Power of Appointment

Most of the time, the attorney will recommend a limited power of appointment. This will create flexibility in your estate plan by allowing the beneficiary of the trust to determine who gets the trust property next (after they die) without having to worry about estate tax inclusion.  This also allows you to preserve the generation skipping transfer tax exemption so all of the assets in that trust that are exempt will not be included in the beneficiary's estate, no matter how large they have grown into.

Reasons to Choose a General Power of Appointment

You should not create a general power of appointment without the recommendation of your attorney.  The power of the beneficiary to appoint the property to him or her self, their estate, their creditors or the creditors of his or her estate will cause the enitire trust amount to be included in the estate of the beneficiary for estate tax purposes.  The whole trust estate could also be subject to the payment of the claims from creditors of the beneficiary.  Finally, the beneficiary may be able to subvert the original intent of the trustmaker (or power grantor) by appointing the property to his or her estate and then leaving the property to someone else in their Will.

We have a new law!

President Obama signed the new tax law on Friday extending the Bush tax cuts for two years. Included in this new law are significant estate tax ramifications. While the overall impact on advisors remains to be seen, there is no doubt that this is bad news for some and good news for others. As a general rule, however, this is good news for the rich.

Here is a quick summary of the estate tax provisions of the new law:

1. $5 million exemption: There is now a $5 million estate tax exemption for each individual. This means $10 million can be exempted from estate taxes for a married couple.

2. Reunification: The estate, gift, and GST tax exemptions have been unified to the $5 million amount. This means that a client can gift $5 million into a dynasty trust while they're alive, using up their estate tax exemption, and not have to wait until they die to take advantage of the increased exemption.

3. Portability: clients who no longer plan for their estate tax exemptions me transfer their unused portion of that exemption to their spouse when they die. If husband dies, he can transfer his $5 million exemption to his wife, and she will now have a $10 million exemption upon her death as she leaves the property to her kids.

4. 2010 election: for clients dying in 2010, they have a choice of law. The client may elect to have a $5 million estate tax exemption with a full step up in basis on all of the decedents property. The client could also choose an unlimited estate tax exemption, but they would only get carryover basis with the additional allocated basis maxing out at $4.3 million.

This law is going to create huge planning opportunities. But there is no doubt, that planning options will change. For many, this means simpler plans which are also less expensive. However, the opportunities for the wealthy to plan and avoid estate taxation have never been better.

We will be conducting a couple of workshops in San Jose, at the end of January or the beginning of February to better help the advisors that we work with understand the details and planning options more fully.

I will post the details in the future.