by Craig D. Hasenbalg (Winter 2018)
For all the talk these days about changes to the tax code, it is easy to lose sight of the fundamental goal of any estate plan: actually, conveying assets to chosen beneficiaries. Taxes can certainly impact that conveyance. But, for estates not large enough to be subject to the estate tax system, transferring assets in the proper way to the proper people is the primary goal.
“Powers of appointment” are one of the effective means to accomplish this simple goal, while also taking into consideration future events. Unfortunately, powers of appointment are often overlooked.
One of the most attractive features of any power of appointment is that it is limited only by the creativity of the maker of the power. At its heart, every power has a “trigger”, which, if pulled, allows a third party to alter an estate plan’s disposition of assets. For example, assume Susan is married to Robert, and together they have two healthy and happy children, Jane and Steve. From a previous relationship, Susan has a son, Trevor, who has seen his fair share of trouble. Trevor has been arrested several times, spent time in jail and has unfortunately developed a seemingly unshakeable cocaine habit.
Despite Trevor’s troubles, Susan loves all three of her children equally, and creates an estate plan so that at her death (assuming Susan dies first), Robert receives all of the income generated by Susan’s assets for as long as he lives. When Robert dies, Susan’s assets are distributed to Jane, Steve and Trevor, equally.
However, Susan is realistic about Trevor’s prospects, and she inserts a power of appointment into her estate plan. The power provides that Robert can insert language into his Will that alters Susan’s estate plan. If Trevor continues his downward spiral (Trevor’s downward spiral is the “trigger” allowing Robert to exercise the power), then Robert can require Susan’s assets to be distributed equally to Jane and Steve to the exclusion of Trevor. Susan’s idea is that if Trevor recovers (which certainly is the hope), then he should receive his full one-third share of Susan’s assets. If this happens, Susan is trusting Robert not to exercise the power. If, however, Trevor is unable to stay clean, then Susan’s assets would go to Jane and Steve and would not help perpetuate Trevor’s wayward lifestyle.
No other estate planning tool in the estate planner’s “tool box” allows for a post-death reallocation of assets so simply and easily. In the example above, although Susan is dead, the ultimate disposition of her assets is not final until Robert chooses to exercise or not exercise the power. In this way, Robert can monitor events after Susan dies, so that Susan’s assets are distributed as Susan would have intended. In appropriate situations, such a powerful device should not be ignored.
There are a variety of ways in which a power of appointment can be drafted to effectuate the ultimate goal of an estate plan. If you are preparing an estate plan, make sure you discuss with your estate planning attorney whether a power of appointment can help distribute, or re-distribute, your assets to those whom you intend.