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What is a Power of Appointment?
A power of appointment is a valuable estate planning tool, which, broadly speaking, is a power that is frequently conferred on a person, including an executor, and the trustee and/or beneficiary of a testamentary or inter vivos trust (the "donee"), in relation to the disposition of assets including a trust fund. More specifically, the donee is provided with an optional power, which if exercised, usually by written instrument or in the donee's will, allows them to dispose of property at their discretion, which would otherwise be disposed of in accordance with the provisions of the testamentary or inter vivos trust if the power is not exercised.
How a Power of Appointment Works
Here's an example of how it works:
John, in his will, creates a testamentary trust, the beneficiary of which is his daughter Jane. The trustees of the trust are required to make payments of the net annual income to Jane during her lifetime and may also make outright payments of the capital to Jane at their absolute discretion.
Upon Jane's death, the balance of the trust fund is divided equally between Jane's children and John's grandchildren, David and Lisa. John also provides Jane with a general power of appointment, which if exercised by Jane, gives her the right to decide to whom the balance of the trust fund will be distributed under her will and on the terms, trusts and conditions she chooses.
Moreover, Jane, by written instrument or in her will, may include a provision addressing the disposition of the balance of the trust fund. If Jane does not exercise this power, upon her death, the balance of the trust would be divided between David and Lisa, as per John's will.
Benefits of a Power of Appointment
A power of appointment provides flexibility, where following the testator or settlor's death, family dynamics, facts and needs have changed, such as David or Lisa in the above example having medical challenges, moving to a different jurisdiction which has different laws including tax laws, having different financial needs, one of them having children of their own, getting married or divorced, or any number of reasons which, if John were privy to during his lifetime, may have affected his decision to leave the balance of the trust fund, in equal shares to David or Lisa outright.
For example, John may have preferred to give a larger share to one child or the other based on their (changed) individual circumstances, or to another person(s) entirely, or to provide for a trust versus an outright distribution if one child has medical challenges that affect their ability to manage money.
A power of appointment allows John to, in essence, delegate the decision to Jane, as to what should ultimately happen with the balance of the trust fund, if Jane so desires.
Types of Powers of Appointment
There are three types of powers of appointment:
- General Power of Appointment - the donee may exercise the power as he or she pleases, including even possibly to him or herself, in some circumstances;
- Limited Power of Appointment – the donee may only exercise the power in favour of certain person(s) as directed by the donor, such as the donor's spouse, children, grandchildren, etc; and
- Hybrid Power of Appointment – the donee is restricted from exercising the power in favour of certain person(s) as directed by the donor, such as the donee him or herself, or their estate.
Key Takeaway
A power of appointment is a valuable estate planning tool, that provides for flexibility to you in relation to the disposition of your property.
A power of appointment allows a person you trust to decide, if they so choose, how property should be distributed, often on your death.
It is always critical to consult an estate lawyer for the drafting of a power of appointment in a will or trust, to best ensure that it your intentions are reflected, and that it is complete, unambiguous, and ultimately enforceable at law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
