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.