Most of my clients’ estate plans ultimately distribute the assets to the children, and if a child predeceases, then her share is often slated to be distributed to her children. This is known as a “per stirpes” distribution.
In many testamentary trusts created for children in a will or trust, that child has the ability, through a “power of appointment” to change the per stirpes schematic. As an example, Susan’s trust indicates at her death to create a testamentary trust for her daughter, Madelyn, then at Madelyn’s death (or if Madelyn predeceases Susan) then the trust is distributed per stirpes to Madelyn’s children, Thomas and Michael.
Susan, however, may grant Madelyn the power to appoint what remains of her share through Madelyn’s will to “my descendants, their spouses and charities” that Madelyn selects. This gives Madelyn broad power to change the default distribution which is set for equal shares to Thomas and Michael.
Perhaps Madelyn wants to treat her sons disproportionately. Or if one son has a drug or alcohol dependency problem, she might choose to include special provisions relating to that and name an independent trustee to manage that son’s share. She might also include her grandchildren, should she want to.
The big question here is whether Susan wants to give Madelyn the authority under the power of appointment to route any part or all of Madelyn’s trust share to her daughter’s spouse when she dies. Madelyn’s spouse’s name is Tony. What if Madelyn can redirect her inheritance to Tony?
What are the risks?
Susan may want the trust to only benefit her bloodline. What if Madelyn leaves amounts to Tony, and after her death he remarries? If his will leaves his entire estate to Tony’s new spouse, then at his death Susan’s wealth might never benefit her grandsons Thomas and Michael.
On the other hand, if Madelyn dies and significant wealth lands with Thomas and Michael, there is the chance that Tony doesn’t have funds to pay for necessities while his children are millionaires. I’ve actually seen this happen with some files. Susan probably wouldn’t want that result either.
There are middle of the road options available. One is to require a continuing trust for Tony if she chooses to exercise her power of appointment to benefit him, as opposed to an outright distribution that may end up out of the bloodline. Susan’s documents could require that an independent trustee manage the account, and determine whether Tony is entitled to distributions, considering the assets and income otherwise available to him.
The trust for Tony could also be build as a “sprinkle” trust, benefitting not only Tony, but Thomas and Michael as well. Any income the spouse doesn’t need can be distributed to the grandsons, for example.
The power of appointment could limit the percentage of Madelyn’s trust that would be funneled into a share for Tony, say 30%. The other 70% could immediately vest with Thomas and Michael.
You get the picture. There are many options available with carefully worded language specific to Susan’s intent.
Finally, realize just because Susan grants her daughter Madelyn the power to appoint her share at her death, this doesn’t mean that Madelyn must or will do so. Madelyn might decide to let the share vest with her sons rather than with Tony.
The power of appointment is a useful tool to make an otherwise inflexible, irrevocable trust more fluid and be able to adjust to the needs of the family many years after Susan’s death. They’re not (or shouldn’t be) boilerplate, however.
I hope that this gives you something new to talk about with your estate planning attorney.
© 2021 Craig R. Hersch learn more at floridaestateplanning.com
