Power of Appointment and Disclaimer Trusts

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A disclaimer trust and a power of appointment trust are estate planning tools that can be used together to provide flexibility in how assets are distributed upon the death of an individual. Here’s how they typically work in conjunction:

  1. Disclaimer Trust: A disclaimer trust is designed to allow the surviving spouse the option to “disclaim,” or refuse, a portion of the inheritance. This disclaimed property then goes into a trust (often called a “bypass” or “credit shelter” trust). The surviving spouse generally has no obligation to fund the disclaimer trust and only does so if it makes sense at the time of the first spouse’s death, based on the surviving spouse’s circumstances and the current tax laws. The main purpose is to take advantage of the estate tax exemption for each spouse while maintaining some level of access to the funds if necessary.
  2. Power of Appointment Trust: This trust includes a provision that grants someone (typically the surviving spouse) a power of appointment over trust assets. The person with the power can direct the distribution of the assets in the trust at their death, within the limits set by the grantor (the person who created the trust). This power can be general, allowing the appointment of assets to anyone, or limited, restricting whom the assets can be appointed to (e.g., to a specific class of beneficiaries like the grantor’s descendants).

When used together:

  • The first spouse’s assets are placed into a trust upon their death.
  • The surviving spouse then has the option to disclaim a portion of these assets, which would then be moved into the disclaimer trust.
  • The assets in the disclaimer trust may benefit the surviving spouse during their lifetime but are ultimately destined for other beneficiaries (like children) upon the surviving spouse’s death.
  • The power of appointment trust can either be the same trust as the disclaimer trust or a different one. If it’s the same, the surviving spouse, through the power of appointment, can direct the remaining assets in the trust at their death, ensuring they are distributed according to the spouse’s wishes within the parameters established by the deceased spouse.

The combination of these trusts provides a strategic way to manage and allocate assets for tax purposes, while also allowing for flexibility to address changes in law, family circumstances, and financial situations. It’s essential for these trusts to be properly drafted and executed in accordance with state and federal laws, and for the parties involved to understand the implications of disclaiming assets and appointing them.

Powers of Appointment – An incredibly flexible estate planning tool

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