A recent Mississippi court case involved a trust created by a mother. She left the assets at her death to her children and grandchildren. However, she gave them in the trust a power to change that disposition. Many clients find that such a “power of appointment” will allow an inheritance to be altered for changed future circumstances.
Ophelia Braswell, at the time of her original trust agreement, had four living children: Ralph Braswell, Charles Braswell, Frances Downs, and Lawrence Braswell. They were named as co-trustees. A fifth child, Bobby Braswell, predeceased Ophelia, and he had two children: Chris Braswell and Tammy Story. Ophelia, the four co-trustees, and the beneficiaries, Chris and Tammy, signed a modification to the trust agreement which provided that in the event that a beneficiary predeceased Ophelia, “that beneficiary’s interest shall be administered for and distributed to such person or persons as such beneficiary shall by Will designate and appoint and in such amounts of proportions and upon such terms and provisions (out-right or in trust), as such beneficiary shall prescribe in his or her Will.” If the beneficiary did not exercise the beneficiary’s power of appointment in the beneficiary’s will, the beneficiary’s interest “shall thereupon vest in and be delivered and conveyed to such beneficiary’s surviving spouse and surviving issue . . . .” Between executing the modification and Ophelia’s death, two more of Ophelia’s sons passed away, Charles and Ralph. A dispute was filed by their widows and children over the disposition of their shares, and the Court ultimately dismissed the case as having been filed too late. Domino v. Braswell, No. 2013-CA-01859-COA (Miss. Court of Appeals).
A “power of appointment” (POA) is a provision in a will or trust that allows the beneficiary to “appoint” some or all of his or her share to someone else under some circumstances. For instance, the maker of a will may allow a beneficiary to execute a POA during the beneficiary’s lifetime or in the will of the beneficiary. The power may be limited to naming certain individuals or classes of individuals (such as spouses and children of the appointing beneficiary) or may be unlimited (allowing appointment to anyone the beneficiary chooses). One particular situation in which many of our clients use a “testamentary” power of appointment (that is, one in the beneficiary’s last will and testament) is in a special needs trust for a young adult child with a disability. The parent who creates the trust may choose to allow the disabled beneficiary to name who will receive the remainder in the trust at the beneficiary’s death, in order to give the beneficiary some control over the trust funds that are otherwise under the sole control of a trustee. In this way, if the beneficiary later marries or has children, the power may permit him or her to leave the assets in his trust at death to those persons.
A power of appointment can cause the assets that are subject to the appointment to be taxed to the beneficiary, so care must be used in determining if such a power will cause unwanted tax consequences. A carefully-drafted power of appointment can give flexibility to a disposition of assets and the ability to adjust to future changes.
Contact us online or call us today to discuss how a power of appointment may be a helpful part of your estate plan.