10 Powers of Appointment

Question 1

Power of Appointment

Definition

Answer 1

1. Power to name who will enjoy or own property
   
   1. Donor grants power
   2. Holder receives power
   3. Appointee holds or enjoys the property
2. Can be general or limited
   
   1. General: can appoint to self, own estate, creditors, or estate’s creditors (all four referred to as “prohibited group” or “restricted parties”)
   2. A power that is not General is “Limited” also called “Special”
   3. Important to differentiate between the two

Question 2

Power of Appiontment

Gift Tax Implicaitons

Answer 2

Events that trigger gift tax include

• Holder exercises general POA (gift to appointee)
• Holder releases general POA (gift to releasee)
• Lapse of holder’s right to exercise to the extent power exceeds the 5-and-5 rule

Question 3

Crummey Powers

Definition

Answer 3

1. A lapsing POA to permit a trust beneficiary to withdraw from a trust for a limited period

Question 4

Crummey Powers

Purpose

Answer 4

1. Purpose is to take advantage of annual gift tax exclusion
   
   1. Placing Crummey power in an irrevocable trust converts a future interest to a present interest, qualifying for annual exclusion
   2. The present interest gift is the right to withdraw, typically min(annual exclusion, amount contributed to trust)
   3. The beneficiary does not actually have to withdraw! Merely having the right to withdraw is sufficient

Question 5

Crummey Powers

Requirement

Answer 5

Beneficiary must be given notice he has the power to withdraw for a limited period

Question 6

Crummey Powers

Potential problem

Answer 6

In a trust with multiple beneficiaries is if a general POA holder releases or lets the power lapse, holder may be deemed to have made a gift to the other beneficiaries

Question 7

Crummey Powers

To avoid gift tax consequences of lapsed power

Answer 7

• To avoid gift tax consequences of a lapsed power, the annual right to withdraw must be limited to max($5,000, 5% of the value of the property).
• Another alternative is to set up multiple trusts, with each trust having only one beneficiary. The separate trusts often can be treated as one trust for administrative purposes.

Question 8

Powers of Appointment

General POA Estate Tax Implications

Answer 8

Gross Estate will include any assets under a general POA held by decedent at DOD whether exercised or not

Exceptions:

1. If the right to exercise is limited to an ascertainable standard (health, education, maintenance, support, or HEMS), the power is not included in the decedent’s gross estate
2. If the right to exercise requires approval of both the holder and someone else (who is deemed to be an adverse party—someone who has an interest in the property), the POA is not included in the decedent’s gross estate because it is a limited POA.
3. If the right to exercise is limited to max(5% aggregate value, $5,000) each year, POA generally not included in Gross Estate.
   
   1. This right to withdraw is referred to as a 5-and-5 power.
   2. The 5-and-5 power must be noncumulative. If the withdrawal is not made during the year, that year’s right to withdraw is lost.
4. The lapse of a power that exceeds 5-and-5 included in Gross Estate for three years (as the lapse of a general POA).

Question 9

Powers of Appintment

Special POA Estate Tax Implication

Answer 9

Assets under a limited or special POA are not included in the holder’s gross estate at death