Tag Archives: estate
Adding Flexibility to Your Estate Plan
What is a Power of Appointment and how can it add flexibility to your estate plan?
A power of appointment is the power given by one person to another (referred to as the “holder” of the power of appointment) to designate who is to receive an asset. For example, if Husband creates a trust giving Daughter the power to determine who is to receive the trust principal, Daughter is the holder of the power of appointment. There are essentially two types of powers of appointment:
- A general power of appointment allows the holder to appoint the assets to anyone, including himself, to his estate, or to the creditors of his estate. Property subject to a general power of appointment at the time of death will be included in the holder’s estate.
- A special power of appointment is exercisable only to a group of persons defined in the trust instrument (for example, to the group comprised of the Trustor’s issue) or in favor of someone other than the holder, the holder’s estate, the holder’s creditors, or the creditors of the holder’s estate. Property subject to a special power of appointment is not included in the holder’s estate.
Special Power of Appointment May Add Flexibility to Estate Plan
A special power of appointment may be used to add flexibility to the dispositive provisions of an estate plan without subjecting the property subject to the special power to inclusion in the holder’s estate. For example, Husband and Wife may designate that the surviving spouse will have a special power of appointment over the principal of the exemption trust (also commonly referred to as the credit-shelter or bypass trust), a trust which becomes irrevocable upon the death of the first spouse. The special power of appointment in this scenario would allow the surviving spouse to make a later determination as to who should receive the principal of the exemption trust and make adjustments accordingly.
Special Power of Appointment May Not Be Appropriate in All Circumstances
The decision as to whether a special power of appointment should be used and the drafting of such a provision must be considered carefully, particularly where there are children from a previous marriage. The use of a special power of appointment in such a situation could result in the surviving spouse appointing all of the trust assets to his or her children, excluding the children of the first spouse to die.
The use of a special power of appointment may add flexibility to the dispositive provisions of an estate plan, allowing someone to make adjustments among beneficiaries, to take into consideration the increased need of a particular beneficiary, or other changes in circumstances. However, as illustrated above, the use of a special power of appointment may not be appropriate in all circumstances.
Duties of an Estate Trustee
Every trust must have an estate trustee to properly administer the elements of the trust. Trustees can be individuals, financial institutions or even organizations.
A trustee follows the precise instructions of the trustor (or the trustor’s authorized representative), and also adheres to rules imposed by law.
Prudent Person Rule
Trustees are subject to the “prudent person” rule. This rule states that trustees should use the same standard of care and diligence that any sensible person would use in managing property. Additionally, a trustee should make a strong effort and utilize all of his/her skills in caring for the trustor’s property.
Responsibilities
A trustee has the duty to accomplish the following:
- Administer internal affairs
- Manage property
- Invest property
- Distribute income and principal
- Deal with beneficiaries impartially
- Use discretion over the important areas of the trust
Beneficiaries
A trustee has a fiduciary duty to the trust’s beneficiaries as well as to the trustor. In dealing with beneficiaries, a trustee should:
- Use property only for the beneficiaries’ interest
- Disclose important facts
- Provide additional information related to the trust upon request of the beneficiaries
Improper Activity of an estate trustee should not:
- Use trust property for personal benefit or purposes not related to the trust
- Acquire interests in conflict with those of the beneficiary
- Sell property to himself/herself
- Delegate his/her duties to another individual
If an estate trustee is suspected of improper activity or misuse of his/her discretionary decision-making powers, the court will review the trustee’s actions after a petition is filed by the trustor or any beneficiary. A trustee may also petition the court for a review if beneficiaries question his/her decisions.
The Annual Exclusion and Gift Taxes
The Internal Revenue Service (IRS) takes a broad view of what constitutes a gift. The IRS advises that gift taxes may apply to the transfer of any property or assets or the use of income producing property, without expecting something of equivalent value in return. Selling something for less than full value or making an interest-free or reduced interest loan may constitute a gift. A gift can be direct, such as a cash gift to a child, or indirect, such as a cash gift to a child’s trust.
The annual gift tax exclusion is the amount that the taxpayer may gift in a calendar year to an individual without being subject to gift taxes. The annual gift tax exclusion amount was increased to $14,000 per recipient beginning in 2013, subject to adjustment for inflation. Gift tax applies to the amount of the gift in excess of the annual gift taxes exclusion.
The annual exclusion is not cumulative, therefore the taxpayer cannot withhold making a gift to his child one year, in the anticipation that in the following year he can make a gift twice as generous free of gift tax. Also, the annual exclusion for gifts does not reduce the available lifetime credit for estate and gift tax.
If a taxpayer pays tuition directly to a qualified educational institution, or pays a health care provider directly for medical services, such payments are not subject to gift tax, and are not counted toward the $14,000 annual exclusion from gift tax for the individual benefiting from the payment. A common misconception is that this exclusion for education and medical expenses only applies where the taxpayer and the individual benefiting from the payment are related, or where there is a duty on the part of the taxpayer to make such payment. Regardless of the relationship between the taxpayer and the individual benefiting from the payment, direct payments for educational or medical expenses are not subject to gift tax.
Filing a Return on Gift Taxes:
- Gifts were given to at least one person (other than a spouse) that exceeded the annual gift tax exclusion amount for the year.
- The taxpayer and spouse are splitting a gift.
- A gift was given, other than to a spouse, that cannot be possessed or enjoyed, or income cannot be received from it, until some time in the future.
- The taxpayer gave a spouse an interest in property that will end sometime in the future.