Including a Power of Appointment in Your Estate Plan

November 16, 2022

Part of planning involves predicting. It can be challenging to predict what your family’s finances will look like at the time you pass away. It requires not only predicting your own finances but those of each beneficiary. Adding a power of appointment in your will or trust allows you to name a person and grant that person with the authority to redirect your inheritance if circumstances should warrant it.

What Circumstances Warrant Invoking the Power of Appointment?

A power of appointment builds flexibility into your estate plan so that a holder can decide at the time of your death where the assets in your estate should actually be distributed.

Debt. This can be useful if one or more beneficiaries has a lot of debt. Creditors may instantly seize these assets once transferred to that indebted beneficiary.

Wealth. The opposite reason would be if one of your beneficiaries is independently wealthy and does not need these additional assets. The assets could be diverted by the holder to a more worthy beneficiary. Often a holder may determine that a whole class of beneficiaries, such as your adult children, do not need the assets, but another class, such as your grandchildren, would benefit more from these assets.

Divorce.If one of your beneficiaries is in the middle of a divorce or a divorce may be a likelihood in the near future, the holder could divert the assets into a trust for that beneficiary to prevent the assets from being marital property subject to equitable distribution.

A general power of appointment gives the holder the right to redirect the inheritance anywhere they want, including charity. In contrast, a limited, or special power of appointment allows the holder to redirect assets among a certain group and under specific circumstances.

Tax Consequences

There are tax consequences that result from conveying a power of appointment. If you give a holder a general power of appointment, the assets are included in the holder’s taxable estate at his or her death and they are responsible for gift or estate taxes even if the power of appointment is never exercised. The IRS looks at the holder as having a form of ownership since he or she has control over the assets. A limited power of appointment avoids all gift and estate tax for the holder.

In Maryland, for a power of appointment to qualify as a “general” power of appointment it must specifically provide that the holder may appoint to himself or herself, creditors or the creditors of his or her estate. Using the language “to appoint by will as the donee sees fit” does not qualify the power as a general power of appointment and does not permit the holder to transfer assets to the holder’s creditors or estate. Adding additional language such as “to any person whomsoever, including his creditors or estate” will convey a general power of appointment in Maryland.

This flexibility tool can be very useful in estate planning. It requires careful drafting and a clear presentation of the appointive property and powers. To learn more about utilizing powers of appointment in your estate plan, contact the experienced attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.

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