What is a Power of Appointment?
A person who has a power of appointment over property has the authority to determine who, possibly including that individual, will become the beneficial owner of the property.[1] A beneficiary can receive a power of appointment from the settlor over certain property distributed to such beneficiary. Section 2041 of the Internal Revenue Code (“Code”) makes a general power of appointment held by a decedent includable in the decedent’s gross estate.[2] Similarly, the exercise or release of a general power of appointment is deemed to be a transfer of property subject to the gift tax by virtue of Section 2514.[3] Despite this basic rule of includability, it is possible to design a power of appointment that will not be taxed in a decedent’s estate. [4]Also, because of the flexibility provided by a power of appointment, the vehicle remains a useful estate-planning device in many instances where it will be included in a decedent’s estate.[5] A general power of appointment is a power by which the decedent has the authority to appoint property in favor of: (1) himself; (2) his estate; (3) his creditors; or (4) creditors of his estate. [6] In contrast, a limited power of appointment will not be included in a decedent’s estate. Essentially, a limited power is any power of appointment that does not fall within the previously noted definition of a general power of appointment. In practice, however, a limited power of appointment for federal estate tax purposes is generally a power that is exercisable only in favor of one or more designated persons or a class of persons other than the decedent, his estate, his creditors, or creditors of his estate.
* Always remember to contact an experienced Arizona estate planning attorney if you have any concerns with your estate plan or if you would like advice on the proper administration of an estate. Williams & Williams Law, LLC is always here to help. We are available for free consultations. Come meet the father-son team.
[1] Dale S. Adams & Robert B. Smith, Estate and Gift Tax, Tax and Accounting 4.13 (2014).
[2] Robert E. Madden, Tax Planning for Highly Compensated Individuals, Tax and Accounting 16.03 (2014).
[3] Id.
[4] Id.
[5] Id.
[6] IRC § 2041(b)(1).