A typical Bypass Trust and/or Marital QTIP Trust created after the death of a spouse (i.e. the “Deceased Spouse”) often requires the trust be automatically distributed to remainder beneficiaries after the death of the Surviving Spouse. There is typically no power granted to the Surviving Spouse to “appoint” trust property in different amounts, percentages, or to different beneficiaries than those already written into the trust.
Similar issues arise when a trust is established for any beneficiary where the beneficiary has no control over the ultimate distribution of the trust property at the beneficiary’s death.
An irrevocable trust such as a Bypass Trust or Marital QTIP Trust can be modified to grant the beneficiary of the trust a “limited” or “general” power of appointment. A power of appointment gives a trust beneficiary to “appoint” the property of the trust to one or more ultimate beneficiaries, following the guidelines set forth in the power.
For example, a General Power of Appointment causes the entire value of the Bypass Trust property to be included in the taxable estate of the Surviving Spouse for Federal Estate Taxation. This may be desirable if the total estate of the Surviving Spouse and the Deceased Spouse is not likely to ever exceed the Federal Estate Tax Applicable Exclusion Amount. Because of the general power of appointment any capital assets such as real estate, stocks, bonds, mutual funds, precious metals, works of art, etc., owned by the Surviving Spouse and the Bypass Trust will receive a new income tax cost basis for income tax purposes. This can represent serious income tax savings for the heirs if the assets are then sold after the death of the Surviving Spouse.
You can also have what I call the (Limited) General Power of Appointment, which causes the value of the Bypass Trust property to be included in the taxable estate of the Surviving Spouse for Federal Estate Taxation, but only up to the amount of property that would avoid Federal Estate Tax if included in the Surviving Spouse’s taxable estate. Any amounts over that value would pass as if there was a Limited Power of Appointment, which would mean that the excess value is not included in the Surviving Spouse’s taxable estate.
The same types of powers of appointment can be added to trusts established for children or other heirs to give them flxibility.
If properly drafted, such a power can be used to reward “good” beneficiaries, punish “bad” beneficiaries, create new beneficiaries, divide trust property in different amounts or percentages, and provide for beneficiaries that are or have become “special needs” beneficiaries.