Definition
The term power of appointment refers to the ability of a person writing a will to designate a beneficiary that will dispose of property. While anyone can exercise the power of appointment at any time, it is nearly always used as part of a will.
Explanation
When an individual writes their will, they have the option of bestowing the power of appointment to one or more of their beneficiaries. This power enables the beneficiary to determine who receives property held in a trust or an estate; the two forms of this power include:
General Power of Appointment: permits the beneficiary to distribute part, or all, of their share of the estate or trust to any individual or organization. There are no restrictions on their ability to exercise their power. For example, the donor might state in their will: "I leave my vacation home in Maui to my son William to give freely to anyone he chooses."
Special Power of Appointment: places restrictions on how a beneficiary may distribute part, or all, of their share of the estate or trust to an individual or organization. For example, the donor might state in their will: "I leave my vacation home in Maui to my son William, who must pass the home on to his two daughters."
When an individual is granted general power of appointment over property held in a trust, they may be subject to gift or estate taxes, even if the power is not exercised. However, limited power of appointment, if worded according to the language outlined by the Internal Revenue Service (IRS), may not subject the individual granted this power to gift or estate taxes.
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