Limited vs. General Power of Appointments: Enhancing Estate Planning Flexibility

Within wills or trust documents, a power of appointment grants an individual, known as the
power holder or donee, the authority to designate another person, the appointee, as the recipient
of all or a portion of assets. Powers of appointment can serve as powerful estate planning tools,
offering significant tax planning opportunities. While we cannot predict the future of your family’s
finances, incorporating a power of appointment into your estate planning documents provides
your loved ones with inherent flexibility to maximize tax savings potential within an estate or trust
when the time comes.

Maximizing Tax Savings and Flexibility with Powers of Appointment

Powers of appointment are often utilized in situations where a beneficiary carries substantial
debt, and the funds received would be subject to seizure by creditors. Alternatively, if a beneficiary
is already affluent and prefers to avoid having assets pass through their own estate, they can
redirect those assets to another beneficiary without incurring taxes. Importantly, when property is
appointed to others, it may qualify for a step-up in basis, resulting in significant tax savings. This
step-up can potentially eliminate or reduce capital gain taxes when future beneficiaries decide to
sell the property.

Differentiating Types of Powers of Appointment: Lifetime vs. Testamentary

While powers of appointment are highly valuable in estate planning, it’s essential to understand
that not all powers of appointment operate in the same manner. They can differ in duration and
have varying tax implications based on their specific type. For instance, powers of appointment
can be granted to an individual to exercise during their lifetime, known as a lifetime power of
appointment or limited lifetime power of appointment. Alternatively, a power of appointment can
be a testamentary power of appointment, exercisable only upon the power holder’s death.

General Power of Appointment: Flexibility for Asset Redistribution

Moreover, powers of appointment can be classified as either general or limited. A general power
of appointment empowers the holder to redirect assets to themselves, their estate, creditors, or
creditors of their estate. It also grants the right to redirect an intended inheritance to any desired
recipient, such as children, grandchildren, charities, or businesses.

Limited Power of Appointment: Specified Directives and Beneficiary Groups

On the other hand, a limited power of appointment, also known as a special or non-general
power of appointment, allows assets to be directed solely to a specified group, such as a particular
trust or among family members or descendants. A limited power of appointment can also enable
a beneficiary to receive assets for specific purposes, such as health, education, or support.

Exercising Powers of Appointment: Power Holder’s Choice and Beneficiary Implications

If exercising a power of appointment is not advantageous for the power holder, the assets that
could have been appointed will pass to their original intended beneficiaries. A power of
appointment merely offers an option for the current power holder to exercise in the present, as
they are in a better position to determine whether redirecting assets would be more efficient or
beneficial.

Schedule a Confidential Consultation: Personalized Estate Planning Solutions

If you or a loved one have questions about creating an estate plan, require a review and revision of
an existing plan, or believe you may be in a position to exercise a power of appointment, our
attorneys at North Carolina Estate Planning and Fiduciary Law are well-prepared to assist you in
navigating the complexities of estate planning. We can help you make informed decisions
regarding the estate planning strategies that best suit your unique situation. Schedule a
confidential consultation by calling us at (704) 248-6325 or completing our online form.