Liquidity, Powers of Appointment, and Trusts - Powers Of Appointment

Powers Of Appointment

Use and Purpose
The power of appointment (POA) over property is the right of the holder of the power to specify who will be the recipient of the enjoyment and use of the property subject to the power.

There are three primary terms associated with the POA:
1) Appointee – Property recipient
2) Donor – Grantor of power over property
3) Donee – The holder of the power

General and Special (Limited) Powers
The "powers" are classified as either "General" or "Special" powers. If the holder can exercise their power without any restrictions or conditions attached, then the power is a general power. Under a special or "limited" power, the holder can only exercise their power under certain conditions, limited periods of time or for specific beneficiaries.

Gross Estate Inclusion:
1) General Powers - YES
2) Special Powers – NO

General Power:
Unlimited right to appoint property to:
Special or Limited Power:

Property may not be appointed to:

5-and-5 Power
The 5-and-5 Power is a general power of appointment that would not be included in the gross estate of the decedent if their power is limited to a "noncumulative right" to withdrawal the GREATER of the following:

1) $5,000, OR
2) 5%of the aggregate value of the property annually

This power is a valuable technique used by financial and estate planners to provide some financial benefit and flexibility to a beneficiary with little or no tax consequences.

Crummey Powers
A Crummey Power is commonly found in irrevocable trust documents, and used to allow the grantor to make annual gifts to the trust that will qualify under the federal gift tax exclusion ($14,000 per beneficiary/per year in 2013).

Qualifications under a "Crummey Power" for a non-taxable gift:
1) The gift must be given to the trust outright (no strings attached), and
2) The trustee must give reasonable notice to the beneficiaries that the gift was made and available for withdrawal

The trust beneficiaries are NOT required to withdrawal the funds. The trustee must merely give notice that the funds were gifted to the trust for their benefit. If the funds are not withdrawn, the trustee can direct the investment of funds, or other use- such as payment of life insurance premiums owned by the trust, etc

  • The right of withdrawal is limited to the LESSER of the amount of the annual exclusion OR the value of the gift transferred.

Distributions for an Ascertainable Standard
A special (limited) power of appointment will be assumed if the decedent has power over the trust to invade the principal to maintain an "ascertainable standard" or HEMS.

"Ascertainable Standard" is:
- Health
- Education
- Maintenance
- Support

No general power is implied if the decedent only has the power to withdrawal corpus to maintain their well-being.

Lapse of Power
When a holder of a power of appointment loses control to determine which beneficiaries will benefit from the trust property, then a release of power of appointment has occurred. If a general power of appointment was not exercised within a specified period of time, it is considered to have lapsed.

Taxation rules apply only if the value of the property which could have been appointed exceeds the greater of $5,000 or 5% of the value of the assets out of which the exercise could be satisfied. (exceeds the 5-and-5 power)

Tax Implications
General powers are virtually the same as outright ownership; therefore taxation is implemented as follows:

Estate Tax:
Fully Taxable – If exercised, released or lapsed
Fully Taxable – If exercised, released or lapsed (greater than 5-and-5 power is taxed)

Gift Tax:
Fully Taxable – If exercised, released or lapsed
Not taxable – If lapsed and power does not exceed that of the 5-and-5 power

Types, Features And Taxation Of Trusts
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