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04.01.22

Powers of appointment, disclaimers, and removal powers—Creating estate plan flexibility

By Brian S. Roth

You may have a good plan as to how you would like your assets to pass upon your death. It is difficult, however, to plan for the unexpected. Thus, it is important to have an estate plan that is flexible to changed circumstances.

There are several methods that can be employed to create flexibility in an estate plan, in particular, powers of appointment, disclaimers, and removal powers. These methods may also have post-death tax benefits.

Powers of Appointment

Instead of giving your assets outright to your beneficiaries, you can have such property held in trust after your death, and give the beneficiaries the power to appoint the property to others. This creates a lot of flexibility because it allows your beneficiaries to decide who receives the property after their deaths, which allows for changing family dynamics that you were unable to anticipate prior to your own death.

A power of appointment can be either “general” or “limited,” and can be exercisable during the beneficiary’s lifetime or at death pursuant to the beneficiary’s will or revocable trust. A limited power of appointment means that the assets subject to the power of appointment are not be includible in the beneficiary’s taxable estate for estate tax purposes. A limited power of appointment cannot be exercised in favor of the beneficiary, the beneficiary’s estate, the beneficiary’s creditors, or creditors of the beneficiary’s estate. In contrast, a general power of appointment subjects the assets subject to the power to taxation in the beneficiary’s taxable estate, and can be exercised in favor of anyone.

You can also grant an independent trustee the power to convert a limited power of appointment to a general power of appointment, thereby subjecting the assets subject to the power to estate tax inclusion in the beneficiary’s taxable estate. This can be useful if the trust holds highly appreciated assets and the value of the beneficiary’s estate is unlikely to be subject to estate tax. (The general power of appointment will cause a “step up” to market value in the beneficiary’s estate, thereby eliminating embedded capital gains.)

Disclaimers

Disclaimers are another post-death planning tool that should be considered. A disclaimer is useful if the decedent is not subject to estate tax or the assets to be disclaimed are not needed by the beneficiary. If a beneficiary disclaims a bequest, the beneficiary is treated as if he or she predeceased the decedent.

Typically, disclaimers are made within nine months of the decedent’s death so that the disclaimer is treated as a “qualified disclaimer” for federal estate tax purposes (and therefore the disclaimed assets are not includible in the beneficiary’s taxable estate). There may be certain instances, however, where it would be beneficial to make a non-qualified disclaimer.

Removal Powers

Finally, you can give your beneficiaries the ability to remove and replace trustees of trusts for their benefit. A removal power is usually given after the beneficiary attains a certain age.

Removal powers are often limited so that the beneficiary cannot replace the trustee with someone who is related or subordinate to the beneficiary. Otherwise, the possession of the removal power may cause the trust property to be includible in the beneficiary’s estate.

Powers of appointment, disclaimers, and removal powers are some of the many methods that you should consider to create flexibility in your estate plan.

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Brian S. Roth

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