Your Estate Matters
Powers of appointment add flexibility to estate planning
LEGAL terms can be very confusing. People frequently confuse "power of attorney" and "power of appointment." They are, however, quite different. Adding to the confusion is that both terms may be abbreviated "POA."
Sometimes a client will ask his estate-planning attorney if the attorney is the client's power of attorney. Actually, a power of attorney is a legal document, not a person. In a power-of-attorney document, a "principal" gives powers, duties and responsibilities to an "agent," who acts of behalf of the principal under terms stated in the power of attorney. This agent is known as an "attorney in fact." A power of attorney grants the attorney in fact authority to make financial decisions and take legal actions of behalf of the principal.
In estate planning, a "general durable power of attorney" is often used so that the attorney in fact is immediately appointed and so that the powers granted to the attorney in fact are broad. Since the attorney in fact can only take the actions that are granted in the power-of-attorney document, the terms included in this document should be considered very carefully.
A power of appointment is not a legal document. A power of appointment is a written authorization by one individual (the grantor) that empowers a second individual (the holder) to exercise authority over assets of the principal under certain conditions.
Why should anyone care about powers of appointment?
Powers of appointment add flexibility to planning. Often, when we do estate planning, we are planning for a future we will not be around to see. As we most likely won't know what will happen far in the future, one way to allow for future modifications to planning is by using powers of appointment.
Consider this example:
John could leave his assets in a trust for the lifetime benefit of his son, Bill. The trust could state that the remainder of the trust assets at Bill's death is to be distributed to Bill's children in equal shares outright. However, John may want Bill to have the ability to change the distribution terms as to Bill's children. Perhaps one child will need more than the others, or a child could become disabled and would need special protection. Since Bill may live a long time after John dies, giving Bill a power of appointment to change the distribution terms to his children would allow for handling unforeseen future circumstances. The power of appointment would be granted in the written language in John's trust document.
In real terms, let's say Bill's son Joey is in an accident years after Grandpa John dies. Joey is left severely brain damaged. Medical treatment and assistance needs will be extensive for the rest of Joey's life. Government assistance programs that provide care would terminate if Joey were to inherit significant assets. As Grandpa John had given Bill a limited power of appointment over the trust, Bill could direct a portion of the inheritance in an amount of his choosing to a "special needs trust" for Joey to be funded when Bill dies. Thus, the assets would be available to help pay for Joey's needs that aren't covered by any government programs from which he is receiving benefits -- and Joey would not be disqualified from eligibility for those public benefits.
Consider establishing powers of appointment to make sure your estate planning has the best chance of responding to your family's future, regardless of what it may hold.
Attorneys Judith Lee Sterling and Michelle H. Tucker, of Sterling & Tucker, can be reached through www.sterlingandtucker.com
or by calling (808) 531-5391.