I’m always looking for shortcuts when driving, especially during busy season. Most long-time Sanibel residents know that the easiest way off the island during March and April is not Periwinkle Drive, rather, it’s down West Gulf to Middle Gulf then East Gulf Drives (did I just give away a secret that I shouldn’t have?). But sometimes my “shortcuts” get me into trouble, especially when I’m traveling and don’t know the local terrain.
Coming up on a fork in the road, I ask my wife Patti “Should we take the left fork or the right fork?”
“How should I know?” Patti responds. I decide to go right.
“Recalculating,” Mrs. Garmin states in her soothing GPS voice. It turns out to be a wrong turn that takes us longer to get to where we are heading. Despite the frustration of taking a wrong turn, I find it amazing when technology can help you correct a driving mistake.
Believe it or not, you can gear up your estate plan to “recalculate” if you make a mistake as well. You can do this by granting someone a “power of appointment.”
Suppose, for example, that your estate plan leaves your assets in a continuing trust that benefits your spouse for the rest of his or her life. You can name your spouse as his or her own trustee so they don’t have to turn to a bank or trust company to receive income or assets. At your spouse’s death your trust then distributes to your children in equal shares.
But what happens if one of your children becomes addicted to drugs or alcohol? What if they have made other poor choices that doesn’t warrant them to receive an inheritance, or at least control their own share as they normally would?
There might also be tax reasons to exercise a power of appointment. What if the distribution to grandchildren in the document would trigger a generation skipping tax that can be avoided? What if there are income tax issues that can be cleaned up?
Since you are dead, you can’t change the provisions of your will, right?
While you can’t change your will, you can embed a “power of appointment” to your spouse to allow him or her to change it. You can limit the powering in a way such that they can’t leave your estate to a new spouse that they remarry, but you can allow them to change how much or in what manner your children eventually receive their inheritance.
There is a danger with leaving a power of appointment, however. Your spouse could disinherit one of your intended beneficiaries for almost any reason, including a reason that you may consider frivolous. So when granting a power of appointment, you have to be sure that you explicitly trust that person, and should go so far as to have a conversation with him or her about your expectations.
This leads me to another interesting point. If you are a beneficiary of a continuing trust, you may have a power of appointment yourself. Suppose your father left a trust for you that continues on for your lifetime and then terminates on your death to your children. You may want your estate planning attorney to review your father’s trust to determine whether you have a power of appointment to change the ultimate disposition of the assets.
You may want your spouse to receive the income from those assets if you predecease him or her before the assets are distributed to your children. You may also find it advantageous for your children’s inheritance to continue on in trust as opposed to an outright distribution that could become subject to the claims of a divorcing spouse or creditors.
To exercise the power, you have to include very specific language in your will. A general disposition of “everything to my wife” is not an exercise of a power. Instead, your will should specifically reference the power and then be very specific and direct as to how the assets are to be distributed. It’s easy to mess this up and create more problems than you solve, as there are a host of legal and tax issues associated with the identification and exercise of a power of appointment.
But it’s nice to know that you can build in your own “recalculation” of your estate plan if it should become necessary. For more detailed information on creating this power of appointment, please check out a recent podcast I recorded on my estate planning website, felp.estateprograms.com, under the Design Module.
The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.
© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.