Powers of Appointment

A power of appointment gives the holder of the power (usually the trustee of a trust) the right to appoint or give away property, usually the property held by the trust. The power may be limited by the trust document. A special power of appointment (one that a power holder cannot exercise in his or her own favor, meaning that the power holder can't get the property out of the trust and into his or her own hands free and clear) is often teamed up with a marital deduction transfer to obtain tax savings.

Within the context of cutting estate taxes, the strategy usually goes like this: A spouse is given the right to use property placed in a trust for life. In addition, she is given a special power of appointment over the property, and the power is exercisable either during her lifetime or by will. Even if the spouse exercises the power by will, the trust property will not be included in her federal gross estate because she can't appoint it to herself.

In addition to its value as a tax minimization tool, a power of appointment can be used to influence a beneficiary's behavior.