Power of Appointment

In this post, I discuss the power of appointment and specifically discuss the difference between general and special powers.

A power of appointment generally exists in the context of wills or trusts and provides an individual the right to dispose of certain specified property belonging to someone else. These powers can serve as valuable estate-planning tools, specifically with regard to the estate and gift tax, such as when dealing with Crummey Trusts.

Important Terms

The donor is the owner of the property over which the power may be exercised.
The donee is the person who receives the power.
The objects are the people from whom the donee may choose the new owner of the property.
The appointee is the object selected by the donee to receive the property.

Types of Powers of Appointment

There are two main types: special and general.

Special Power of Appointment

A special power of appointment allows the donee to choose appointees from a designated group of people. “I leave all my rental homes to my children, my brother John to choose which child receives which property” is such an example.

Special powers do not allow the donee to exercise the power in favor of himself, his estate, his creditors, or the creditors of his estate.

General Power of Appointment

A general power of appointment allows, but does not require, the donee to exercise the power in his or her own favor. “I leave my rental homes to be distributed as my brother John deems appropriate,” is such an example.

Because of these broad powers, the subject property is generally considered to be part of the donee’s estate for estate tax purposes, whether or not he has exercised the power.

Time Limits For a Power of Appointment

The donor can also limit the time at which the donee may exercise the power.

A testamentary power of appointment, for example, allows the donee to exercise the power only through a will. “My rental properties to my brother John for his life with the remainder to whomever he appoints by will,” is such an example.

Lifetime powers of appointment, on the other hand, allow the donee to exercise the power during his lifetime, whether at any time during his life or only during a specified time period.

Failure to Exercise the Power

Implicit in the intent to create a power of appointment is the understanding that the donee is not required to exercise this right. If the donee dies or the term of the appointment expires without the donee’s making the appointment, the property will go to whomever the donor has designated as the recipient in the event of a default of appointment. If the donor did not specify what should happen in the event of a default, the property will generally revert back to the donor.

Power of Appointment In Sum

These powers are fairly simple in theory but can be quite complex in practice, particularly where they are utilized for purposes of tax planning. Therefore, it is important to consult with a competent attorney before creating such powers.