Dedon on Estate Planning

Lessons To Learn

My good friend, former Marine officer Joe Cecala, is a renaissance man: He is an entrepreneur, business executive, author, supporter of the arts, and philanthropist. In his spare time, Joe did all of us a favor by listing his "Other Ten Commandments, The Lost Tablets of Leadership." I have reprinted them verbatim below.

Why are those Commandments on an estate planning blog? Well, our objective is to help closely held business owners preserve their assets for future generations and other beneficiaries of their choice. The better the leadership, the more assets there are to preserve. Just as important, these Commandments also provide lessons we all can use to our advantage.

 

Limited Powers of Appointment: Simple but Effective

In estate planning as in life, we strive for simplicity. However, even relatively straight forward documents, such as Wills and Revocable Trusts, can be complex. Simplicity is further sacrificed when advanced planning techniques are necessary, such as GRATs, Intentionally Defective Trusts and other tools that I have written about in the past. But there is one simple estate planning tool that is very simple and very effective: a limited power of appointment.

A person who holds a limited power of appointment (the "donee") can distribute assets to anyone the donee chooses other than the donee, the donee's creditors, the donee's estate or creditors of the donee's estate. A typical limited power of appointment would be the following:

Mr. Rich Client creates a Trust, to be funded upon his death, naming Dorothy Daughter as the beneficiary. Dorothy also has a limited power of appointment. Under the limited power of appointment, Dorothy may distribute any remaining Trust assets upon her death to any beneficiaries she chooses, other than Dorothy, her estate or her creditors. Thus, although Dorothy is not taxed on the Trust assets upon her death, she has great flexibility over how the assets are distributed.

A limited power of appointment takes on added significance if Mr. Rich Client desires to make lifetime gifts to an Irrevocable Trust for estate tax advantages. As we know from prior blog posts, Rich can give away a total of $5 million during 2011 or 2012 without triggering gift or estate tax. Although this is a wonderful estate tax advantage, Rich may be concerned that he is giving away assets that he may need in the future. So what if Rich gave $5 million to an Irrevocable Trust, but also gave a donee a limited power of appointment over such assets? If the donee agreed to exercise the power of appointment and return some or all of the assets to Rich if he needed them, Rich would be protected. If the IRS could establish there was an understanding between Rich and the donee that the donee would return the assets to Rich upon request, then all of the Trust assets would be back in Rich's estate.

I recommend an article on this subject that was published in the January 2011 issue of Estate Planning, written by Lee S. McCullough, III.