In 1951, the Powers of Appointment Act was established. This was one of the greatest developments in the tax and estate planning sector. A power of appointment in broad terms means that a person has the power to dispose of a property, and they hold that power even if they do not own the property in question. This could be a “reserved” power or a “donated” power.
This blog will give a brief overview into what powers of appointment are and how they can be used to a person’s benefit when estate planning.
A reserved power of appointment is a power to appoint property that has been retained by the owner of the property in connection with a conveyance of the property. However, for tax reasons, they are not treated as powers of appointment but instead “strings” on the transferred property so that the transfer itself becomes taxable to the transferrer’s estate.
The main difference between reserved powers and donated powers is that reserved powers may or may not be taxed, whereas donated powers are never taxable.
When is it wise to use powers of appointment?
A common situation for using powers of appointment occurs when a person leaves his or her property in a trust for his or her surviving spouse and gives a remainder to their children. In this limiting situation, the income raised from that property may not be enough to financially support the surviving spouse. If the surviving spouse had also been given a power of appointment to withdraw any principal in order to support him or herself during his or herlife, the scenario would have been a much more suitable one.
Source: North Carolina Law Review, “Powers of appointment,” Charles L . B . Lowndes, accessed Aug. 24, 2017