Structuring Trust Powers of Appointment for Tax Minimization and Asset Protection

Description

Powers of appointment in trust documents are an often overlooked estate planning and wealth transfer tool. While most planning counsel have a working knowledge of this powerful tool, planners often underutilize the basis adjustment and asset protection advantages that well-drafted powers of appointment provisions can provide.

The basic definition of a power of appointment is the right of a donee, conferred usually by deed or trust, to direct property to another person. Within the bounds of estate planning, however, there are various types of powers, each of them carrying specific transfer and income tax consequences.

Planning counsel must determine the type and extent of the powers of appointment, based on the testator’s intent. At the same time, counsel must avoid creating unintended powers in the trust document. Further, what kinds of restrictions can be added without impacting the desired tax or asset protection results?

One type of trust structure that can provide heightened planning flexibility is the Upstream Optimal Basis Increase Trust. This is an irrevocable grantor trust that has a senior generation family member as a beneficiary who also holds a testamentary power of appointment over specified assets in the trust. Estate planning counsel can provide significant value by structuring Upstream OBITs under appropriate circumstances.

Listen as our experienced panel provides a thorough and practical guide to structuring powers of appointment in trust documents to provide asset protection and inter-generational transfers while avoiding unnecessary transfer tax. The panel will discuss asset protection, spousal elective share and other non-tax considerations in utilizing powers of appointment, as well as their use for tax shifting and securing a step up in basis, including the issues surrounding the granting of such powers in trusts to older relatives (a.k.a. Upstream Optimal Basis Increase Trusts).