Seminar attendees have been astounded to learn that everything they have done to create a Trust estate and an inheritance for their children or heirs can be undone after their death. That’s right, it can all be substantially changed to thwart their objectives. They are found in almost any Trust and if not fully understood or explained by the Attorney who drafts the Trust, the consequences can be devastating. We commonly see their ramifications in Trusts that include blended families, but can also have the same results with traditional families.
Powers of Appointment: What are they and how are they effective?
Powers of Appointment allow the holder of such powers to appoint property or assets held in Trust. For example, I may give my spouse the power to appoint my estate or my one-half of the community property in a Trust provision that takes effect on my death. If I give her General Powers of Appointment, she as the holder of the power, may appoint such property or assets I owned at death to anyone she desires, including herself. If, however, I provide her with a Limited Power of Appointment, she can only appoint the assets I own at death to a limited class of persons or entities which I designate. The limited class could be my/our children, grandchildren or charities, etc. In other words, she couldn’t appoint the assets to herself nor anyone else not included within the limited class of takers. So, how can such powers create havoc in the Trust estate and among the potential heirs?
Example #1: Beth and Bob have three children and create a Family Trust to avoid probate. They provide a distribution of their estate, after years of employment and investment, to their children in three equal shares as an inheritance. The Trust includes a General Power of Appointment for the surviving spouse. Bob dies in 2011 and Beth re-marries in 2012. Beth amends the Trust and utilizes the General Powers of Appointment to appoint one-half of the estate to her new husband, Biff. Beth subsequently, passes away and the children’s inheritance in reduced by one-half in favor of their new step-father. Is this the result that the natural father, Bob, intended?
Example #2: Kathy and Kevin have a blended family of two children each by prior marriages and create an A-B Trust. The Trust is to be divided on the death of the first spouse with the assets split equally between the Trusts. The A Trust is designated for the surviving spouse and the B Trust for the deceased spouse. The A-B Trust also includes a General Power of Appointment over the A Trust and a Limited Power of Appointment over the B Trust limited to the children with the surviving spouse as the holder of the power. Kathy and Kevin provide that after they are both deceased, the Trust estate is to be divided into four equal shares for the children.
After 10 years of marriage, Kevin dies in 2010. The Trust is divided equally in value between the A and B Trusts as per the Trust provisions. During the Trust Administration and the division of the Trust estate, Katy comes to understand the extent of the authority she has over the two Trusts based on the Powers of Appointment. Because of her strong relationship with her two children by a prior marriage, she decides to amend the Trust distribution. She exercises the Limited Power of Appointment over the Decedent’s Trust B and appoints the assets as follows: 80% to be divided equally between her two children; 20% to be divided equally between Kevin’s children.
Kathy then exercises her General Power of Appointment over her A Trust appointing it entirely in equal shares to her two children, eliminating Kevin’s two children.
As a result of the Powers of Appointment provided in the Trust, Kathy’s children will inherit 90% of the Trust estate and Kevin’s children 10% at Kathy’s death. Obviously, this was not the intentions of Kevin nor the original provisions of the Trust. The Powers of Appointment changed everything.
You should have your Trust reviewed by a competent attorney to determine if these hidden powers exist in your Trust. If so, you may wish to delete them or amend them to buffer their effect.