Life is an interesting ride with many surprises. Who would have expected it to turn out the way it has? Forty years ago, as we walked to our local library, who would have thought that we could have more information available at our fingertips online than would fit in any library? Who would have guessed that these high school dropouts would have been so successful: Julie Andrews (actress / singer), Louis Armstrong (jazz musician), Kevin Bacon (actor), Lucille Ball (comedienne), Irving Berlin (composer), Tom Cruise (actor), Thomas Edison (inventor), Nicole Kidman (actress), Ray Kroc (McDonald’s founder), Keanu Reeves (actor), Vincent van Gogh (painter), and George Washington (first American president).
The roller coaster of life holds many surprises, so maintaining flexibility is the best strategy. You can maintain flexibility even after you are gone if you give your children or others the ability to make decisions for you. Looking far down the road is always a difficult task. It’s always easier to decide what to do if you have more information at your fingertips. Wouldn’t it be nice if you could know how things would turn out before you did your planning?
Well, unfortunately, we cannot go forward in time and see for ourselves. However, we can do the next best thing: We can let someone who is there in the future make the decision. So, when you die, you do not need to leave everything etched in stone, you can let your spouse have a power to change things among your children. Similarly, each child can be given a power to change how and in what proportion your assets go down to their own children.
These are called “powers of appointment.” These powers allow the holder to appoint the assets in the trust. A power could allow the holder to appoint the assets to anyone in the world, including the power holder. This would be a “general” power of appointment and has tax consequences for the holder. Another kind of power is a “limited” power of appointment, one that cannot be exercised in favor of the power holder or his or her creditors, his or her estate, or the creditors of his or her estate. The power could be limited to a select group of persons such as your descendants or it could allow the power holder to appoint the assets to a broader group of persons or entities and it is still considered limited. A limited power does not cause tax consequences for the holder.
Your surviving spouse may have a much better idea twenty years after your death which of your children has the greatest need. Perhaps your rebellious teenage daughter turns out to be a successful heart surgeon while your studious son devotes his life to elementary school education. With a limited power of appointment, your spouse would have the ability to adjust your estate plan to provide more assets for your son, if appropriate.
It is impossible to anticipate all possible circumstances. However, a limited power of appointment can provide the desired flexibility for your estate plan, even without a crystal ball.
Compliments of the McGee Law Firm, Attorney Brandon McGee
Written By: The American Academy of Estate Planning Attorneys
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