When a person creates a trust to distribute his or her assets upon his death, that person may sometimes name someone and grant him or her power of appointment. Power of appointment in the context of an estate trust refers to a power granted to a person to distribute the trust assets as he or she pleases. Granting a person power of appointment can be a good way to ensure that a trust beneficiary has flexibility to transfer trust assets to his or her heirs upon death. In some situations, however, it can defeat the intent of the original grantor.
Generally, when trusts are created, the grantor leaves specific people as beneficiaries under the trust. However, a grantor may want a particular person to have the power to make appropriate changes to the trust to name new beneficiaries. A beneficiary, a trustee of the trust, or another person not otherwise connected to the trust may be granted the power of appointment. A person who holds power of appointment can make significant changes to a trust after the grantor’s death, and depending on the nature of the power of appointment, may be able to grant him or herself the trust assets.
Powers of appointment can be used to exclude people that the grantor would have wanted to receive part of the assets. For example, if one child holds power of appointment, he or she can exercise it to exclude siblings from receiving the trust assets. Similarly, the grantor’s spouse can exercise powers of appointment to exclude the grantor’s children from a previous marriage in favor of her own children. In this way, powers of appointment can be used to defeat a grantor’s true intent if the grantor would have preferred to leave assets to the excluded group.
A grantor may limit the power of appointment to help protect trust assets from creditors. Under a limited power of appointment, the person who is granted the power is allowed to transfer the assets to a wide range of people, but is restricted from making transfers to creditors.
A person who holds a power of appointment can exercise it during his or her lifetime or at death by including appropriate terms in a will. If there are specific instructions in the trust document on how the power should be exercised, then these instructions must be followed in order to make the exercise valid. It is also important that the person actually exercises the power of appointment because an intent to do so is not sufficient. If the power of appointment is not exercised, the assets are distributed as per the terms of the trust or state law, whichever is applicable.
Contact an Experienced Estate Attorney
It is important to ensure that you understand the implications of making certain elections in your estate planning documents. You should speak to an estate planning attorney before granting anyone power of appointment in order to ensure you understand how that will affect your beneficiaries. If you are looking for legal assistance in setting up a trust or otherwise planning your estate, you should contact Resnick Law, P.C., to speak to the experienced estate planning attorneys in Bloomfield Hills and Detroit, Michigan.