- Grantor Can Retain Limited Power of Appointment (LPOA)
- General Power of Appointment
- Limited Power of Appointment
Grantor Can Retain Limited Power of Appointment (LPOA)
Purpose of Retaining LPOA
The purpose of retaining a limited power of appointment is two-fold:
- The grantor retains control to designate new beneficiaries
- The gift is an incomplete gift for purposes of the gift tax
- Flexibility in case of changed circumstances (e.g., one or both spouses needs institutional care before the look back period expires)
Gift Tax: Gift Is Incomplete and Not Taxable
- donor - The person creating the power of appointment.
- power of appointment - “the power to dispose of property.” Bove.
- special or non-general power - “A power that by its terms cannot directly or indirectly benefit a powerholder” Bove.
- general power - a power that “that can benefit the powerholder” Bove.
- cascading power - The power could “automatically pass to another on a powerholder’s death or disability” Bove.
- avoid income, gift, or estate tax
- asset protection
Power of appointment can be
- reserved by the owner of the property
- given to someone other than the owner
- “the key and most useful feature for asset protection purposes is that for property law purposes, the powerholder does not own, that is, he has no interest in the property subject to the power, because the power is not considered an interest in property. Contrary to what some believe, and contrary to our tax law concept, this applies to one holding a general power as well as one holding a special power.” Bove.
Planning is Flexible
- Conditions. “the donor could provide that the power would begin and end on a certain date, or at a certain age of the powerholder, or almost any other condition.” Bove.
- Transferable. “The power could be transferrable to another” Bove.
- Automatically Pass. The power could “automatically pass to another on a powerholder’s death or disability (a ‘cascading power’)” Bove.
- Terminate. “it could terminate on divorce of the powerholder” Bove.
- Consent. “it could require consent of another for its exercise.” Bove
- public policy
- “in those states that still have it, the rule against perpetuities” Bove.
Fiduciary v. Nonfiduciary Powers of Appointment
- “it is very important to distinguish powers of appointment that are fiduciary versus those that are non-fiduciary.” Bove.
- Fiduciary Powers
- “A trustee with discretionary powers, for example, holds a fiduciary power of appointment, which must be exercised (or not) within the scope of the trustee’s fiduciary duty.” Bove.
- “Note also that a power can be a fiduciary one even though held by a non-trustee. For instance, where the settlor grants his sister the power to appoint trust principal for the benefit of her children’s health and education, or where powers are given to a trust protector to carry out the purposes of the trust.” Bove.
- Non-fiduciary Powers
- “The holder of a non-fiduciary power, on the other hand, is governed only by two rules: the language (terms and provisions) of the grant of power, and the prohibition of committing a fraud on the power (as, for example, where a holder of a special power receives compensation for exercising the power in favor of a particular appointee).” Bove.
General Power of Appointment
IRC 672(a) deems a person having a general power of appointment over the trust property to have a beneficial interest in the trust.
Limited Power of Appointment
The exercise, lapse, or release of a limited power of appointment is not valued under IRC § 2702.