6.1 Background

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

6.1 Background

Powers of appointment can be useful in estate planning, from both a tax and a nontax standpoint. A power of appointment is a device through which the owner of property (the donor) reserves to himself or herself or transfers to another (the donee) the power to designate, within the limits set by the donor of the power, the person or entity (the appointee) who will receive the property and the interest that will be received.¹ Although a definition is a helpful beginning point, it must be recognized that powers of appointment may take numerous different forms and that no particular wording is necessary to create a power of appointment.

The utility of a power of appointment comes from the flexibility it adds to an estate plan. Although not limited in usage to trust instruments, powers of appointment are most frequently used in trusts. Because changes in circumstances may occur after the creation of a trust, the power of appointment provides a convenient and effective way to respond to those changed circumstances.

Several typical uses of powers of appointment can be seen in the examples that follow.

Example 1: John, a widower, has two daughters, one of whom has two children; the other has no children. John wants to provide for his two daughters and any grandchildren through a trust. He passes his estate into two trusts—one for each daughter. Each trust pays income and principal to the daughter...