What Is a Power of Appointment

An estate plan is a set of documents that is supposed to document your wishes. However, life isn’t stagnant. So your estate plan can’t be a “set it and forget it” task. One option is to update your estate plan whenever there is a change. However, that’s not practical. A power of appointment offers a practical solution by allowing you to delegate decision-making authority to someone you trust. That flexibility can prevent unintended outcomes and keep your plan aligned with your wishes.

What Is a Power of Appointment?

A power of appointment gives someone you trust the authority to make inheritance decisions on your behalf. The person creating the power is called the donor. The person receiving the power is called the donee or holder. The people who could potentially receive assets are called appointees. Ohio Revised Code § 5815.12 defines a power of attorney with broad terms. It is the authority to direct who receives property, regardless of how it’s labeled. While the holder can be anyone you choose, they must be legally eligible. They must be at least 18 years old.

How a Power of Appointment Works in an Estate Plan

A power of appointment is typically designated in the will or through a trust. These are documents that are prepared as part of an estate plan. The goal is to build flexibility into the estate plan by appointing someone you trust, like a friend or family member, to make decisions for you.

The donor will outline the duties and rules for the holder. Then, when the time comes, the holder will follow these rules to decide who receives the assets.

Benefits

Giving someone the power of appointment enables them to make more informed decisions. A holder can make fully informed decisions once all the facts are known. This can be useful when creating an estate plan while having minor children who may need care.

There are several potential tax advantages that come with creating a power of appointment. When set up correctly, a power of appointment can help avoid estate or transfer taxes. Speaking with an estate planning attorney is essential for ensuring the correct language and structure are used. An attorney will know federal and state law to ensure compliance while also addressing tax concerns.

Types of Powers of Appointment

There are two types of power of appointment. The first is a general power of appointment. This is the broadest form of appointment. There are no restrictions on how the holder can exercise and execute their power when making decisions.

By default, if the power of appointment doesn't fit into the general definition, then it is the second type of appointment. A special power of appointment places limits on the holder. It is up to the donor to define these limits. The potential appointees could be a specific group of people. The distributions could be limited to specific purposes, such as education, maintenance, or health.

The language used when creating the power of appointment will be the determining factor of which type of appointment is created. This is why it’s important to work with an attorney when creating the power of appointment. An estate planning lawyer will know the correct language to use and discuss how potential restrictions will function when the time comes.

Common Mistakes to Avoid

While a power of appointment and a power of attorney sound similar, they are two very different legal tools. Someone granted the power of appointment only has authority to make decisions about estate distributions. Someone granted the power of attorney can make decisions about legal, financial, or medical situations.

It’s also important to fully understand the seriousness of granting someone power of appointment. You need to trust that the person chosen will make decisions that you will agree with. Granting a general power of appointment is the most flexible, but it also creates greater freedom. There is a risk that the holder will deviate from what you would have chosen. If there is any doubt or you have certain wishes you want upheld, these need to be defined. Include safeguards like making a list of eligible beneficiaries or limiting conditions.

Creating a power of appointment shouldn’t be done in a vacuum. For it to be effective, it should be coordinated with the overall estate plan. An estate planning lawyer can help ensure that all elements of your estate plan work together and do not contradict each other. That way, everything functions the way you intend.

Talk to an Estate Planning Attorney

Building flexibility into your estate plan is one of the most effective ways to protect your intentions. A power of appointment allows you to do exactly that. It gives someone you trust the ability to make decisions when it matters most. Gudorf Law Group works closely with clients to create estate plans that are both practical and forward-thinking. Contact our team today to start building an estate plan that works for the long term.