spotlight on: Powers of Appointment

Posted by : APD | May 5, 2021

Part of the process of preparing your estate plan is becoming familiar with the nature of your assets.  As we tell clients – we do not need exact values but we need enough information to determine whether estate tax is an issue, for example.  Sometimes a client will tell us that they are a beneficiary of another person’s trust.

Let’s imagine Elizabeth comes to see us and informs us that she is a beneficiary of her late father George’s trust.  The trust holds certain real property and the rental income gets distributed out to Elizabeth and her sister Margaret for life.  Can Elizabeth pass this benefit on to her beneficiaries if something happens to her during the term of George’s trust?  The answer is always twofold: maybe; we need to see George’s trust.

It may not be sufficient for Elizabeth to assign her interest in her father’s trust, to her own trust.  One can assign many things to a trust, for example personal property or business interests, and we have a particular form by which we do this.  However where a beneficial interest in a trust is concerned, it is necessary to dig deeper.  We will review the language in George’s trust to determine what happens to Elizabeth’s interest upon her demise.  It may say that her interest lapses, or goes to her descendants, or goes to Margaret.  Alternatively, it might grant Elizabeth a lifetime “power of appointment” by which she can appoint (designate) beneficiaries of her share.

There are different types of powers of appointment – some broad, some limited – and they can be employed to confer certain tax advantages on the powerholder.  Most importantly for Elizabeth’s purposes is that it gives her the power to direct the disposition of an irrevocable trust!  Perhaps the default language of George’s trust provides that if Elizabeth dies, her share passes to her children.  But perhaps Elizabeth feels her children have ample resources and would rather the funds benefit a Corgi rescue organization.  The key is to exercise the power of appointment in precisely the way George’s trust requires and in conformity with California law.

Probate Court may be a court of equity, but California courts have enforced this area of the law strictly.  Some say this is to prevent the accidental exercise of powers of appointment.  Attention to detail and big picture thinking are both critically important in the estate planning context.  If you are a beneficiary of a trust and want to know how that ties into your own estate plan, remember powers of appointment and contact your estate and trust attorney for help.