Powers of Appointment

A power of appointment gives the holder of the power (usually the trustee of a trust) the right to appoint or give away property, usually the property held by the trust. The power may be limited by the trust document. A special power of appointment (one that a power holder cannot exercise in favor of himself, meaning that the power holder can't get the property out of the trust and into his or her own hands free and clear) is often teamed up with a marital deduction transfer to obtain tax savings.

Within the context of cutting estate taxes, this strategy usually goes like this: A spouse is given a special power of appointment over some property placed in a trust, and the power is exercisable during her lifetime, or by will. The spouse also receives a right to use the same property for life. Even if the spouse exercises the power by will, the trust property will not be taxed in her federal gross estate because she can't appoint it to herself.

In addition to its value as a tax minimization tool, a power of appointment can also be used as a means of influencing a beneficiary's behavior. For example, you can give a trusted friend or family member the power to appoint property held in trust among a specified group of people, or the world at large. After your passing, this power holder can use the "power of the purse-strings" to nudge along your heirs to move in the direction that you would like. Certainly, you would have to have great trust in the person you name as holder of the power, but you could protect your heirs by specifying the small group of individuals that property could be given to, and by providing that, if any of the property has not been appointed at the power holder's death, such property is to be distributed to named individuals (whom you specify).