Many people think that a power of appointment is a power of attorney; but, they are different estate planning concepts.
In a power of attorney, the principal (i.e. you) authorizes an agent (i.e. trusted loved one) to act on your behalf when you are unable to act or it is inconvenient for you to act. Common types of powers of attorney are for health care, child care, and finances.
On the other hand, a power of appointment allows a beneficiary to direct who receives the assets next.
A general power of appointment indicates that the beneficiary can appoint trust assets to anyone in the entire world, including his or her creditors. The general power of appointment is typically used to ensure that trust assets are taxed in the beneficiary’s estate; thus, avoiding the generation skipping tax.
A limited power of appointment give the beneficiary the power to appoint trust assets, generally, to anyone in the entire world, excepting his or her creditors.
Often a limited power of appointment is even more limited, granting the beneficiary the power to appoint trust assets only to his or her blood line.
A beneficiary must exercise the power of appointment, whether general or limited, in his or her own trust or will. If the power of appointment is not exercised, the original trust provisions will determine who receives the assets at the beneficiary’s death.
If you have questions about powers of appointment, consult with a qualified estate planning attorney.