A power of appointment is a highly effective and flexible estate-planning tool that allows a person you trust to decide how certain property will ultimately be distributed often long after your own death.
Broadly speaking, a power of appointment is a discretionary authority granted to an individual (the donee), commonly an estate trustee, trustee, or beneficiary of a trust. If the power is exercised typically by a written instrument or through the donee’s Will, it allows that person to redirect the distribution of trust assets. If the power is not exercised, the property is distributed according to the original terms of the Will or trust.
How a Power of Appointment Works
Consider a common example.
Michael creates a testamentary trust in his Will for the benefit of his daughter, Sarah. The trustees are required to pay Sarah the net annual income during her lifetime and may also distribute capital to her at their discretion.
Upon Sarah’s death, Michael’s Will provides that the remaining trust assets are to be divided equally between Sarah’s children, Andrew and Emily. However, Michael also grants Sarah a general power of appointment, allowing her, if she chooses to decide who receives the remaining trust assets and upon what terms.
Sarah may exercise this power by including specific instructions in her Will or by executing a separate written instrument. If she does so, her directions override the default distribution set out in Michael’s Will. If she does not, the trust assets are distributed equally to Andrew and Emily, as originally provided.
Why Use a Power of Appointment?
The primary benefit of a power of appointment is flexibility.
Estate plans are often drafted years or even decades before they take effect. In that time, circumstances can change significantly. Beneficiaries may experience health issues, financial difficulties, marriages, divorces, or relocations to jurisdictions with different legal and tax regimes. Family dynamics evolve, and new generations are born.
A power of appointment allows the original testator or settlor to acknowledge this uncertainty and delegate the final decision to someone who will have a clearer picture of the family’s circumstances at the relevant time. Rather than locking in a rigid distribution, the testator preserves adaptability while still maintaining overall control.
Types of Powers of Appointment
There are three main types of powers of appointment:
- General Power of Appointment
The donee has broad discretion and may, in some cases, appoint the property to themselves or their estate. - Limited (or Special) Power of Appointment
The donee may only appoint the property among a defined group of beneficiaries specified by the donor, such as children or grandchildren. - Combined Power of Appointment
The donee has discretion, but certain persons, often the donee or their estate—are expressly excluded from benefiting.
Comment
A power of appointment is a powerful estate-planning tool that provides controlled flexibility in the disposition of property. It allows you to rely on someone you trust to make future distribution decisions, while still setting the framework and boundaries within which that discretion may be exercised.
Because powers of appointment carry important legal and tax consequences, they must be carefully drafted. Obtaining advice from an experienced estate lawyer is essential to ensure that your intentions are clearly expressed, legally enforceable, and aligned with your broader estate-planning objectives.
Brian Madigan LL.B., Broker
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