Potential Legal Implications of the Promissory Note

In the context of a trust, a power of appointment is a legally binding provision contained in a trust which gives a surviving spouse or other beneficiary the authority to change or re-direct the trust’s property in a way that may be different from the disposition otherwise provided for in the trust. For example, if Husband creates a trust giving Daughter the power to determine who is to receive the trust principal, Daughter is the holder of the power of appointment.

The primary intent of a power of appointment is to grant the surviving spouse or other beneficiary the authority to determine how a trust will be distributed after the death of the decedent. Although the surviving spouse or other beneficiary may exercise this power of appointment at any time during their life, its use is rare outside of a Last Will and Testament. There are essentially two types of powers of appointment:

General (Broad) Power of Appointment

A general or broad power of appointment allows the holder to appoint the assets to anyone, including himself, to his estate, or to the creditors of his estate. Property subject to a general power of appointment at the time of death will be included in the holder’s estate.

Special (Limited) Power of Appointment

A special or limited power of appointment can be exercised only in favor of a certain class of beneficiaries such as children or issue and may not be exercised in favor of the power holder, his or her creditors, his or her estate, or the creditors of his or her estate.

Giving powers of appointment to trust beneficiaries can have important tax consequences. Different tax consequences result from giving a general versus a limited power of appointment. A general power of appointment will cause the assets to be includible in the donee’s estate regardless of whether he or she exercises the general power of appointment. The actual exercise of the general power of appointment will cause the property to be taxed to the donee for estate and gift tax purposes. Alternatively, a limited power of appointment will generally not result in estate or gift tax inclusion by the donee holding the power.

Powers of appointment are an effective way to build flexibility into your estate plan, but should be given careful consideration when evaluating their tax consequences. It is important to consult with an experienced estate planning attorney when considering whether to utilize powers of appointment in your estate plan. If you are interested in utilizing a power of appointment or have any questions or concerns regarding their use and benefit, the attorneys at Waldron & Schneider are here to assist.

The legal information in this blog entry is not intended to be a substitute for seeking personalized legal advice from an attorney licensed to practice in your jurisdiction.  Further, nothing contained in this article is intended to create an attorney-client relationship with any reader.  This article and website are made available by Waldron & Schneider for educational purposes only and to give basic information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and Waldron & Schneider. The article and website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. For more information or questions you can contact us and one of our attorneys will be in touch soon.
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