What are Powers of Appointment?

When drafting an estate plan, the main goal is to create a plan that meets the desires and needs of the client with a focus on the eventual distribution of the client's assets to the client's heirs. However, incorporating some level of flexibility into a plan to account for unforeseen changes can be beneficial. One way to provide flexibility is to include "powers of appointment" into a testator's last will and testament.

A power of appointment ("POA") is clause in the will where the testator, the person writing the will, selects a person who will be given the authority to dispose of certain property that is controlled by the will. There are generally three "people" involved in a POA. The person receiving the property under the POA is typically called the appointee. The person granting the power of appointment is called the donor, testator, or grantor. The person holding the power to distribute the property is typically called donee or the holder. Thus, under a very basic example of a power of appointment in a will written as such "I leave my baseball card collection to be distributed as my brother Joe sees fit," the holder would be Joe, I would be the grantor and whomever Joe decided to inherit the baseball cards would be the appointee.

There are two types of powers of appointment: general powers of appointment and special/limited powers of appointment. The delineation of the two types can be important for several reasons. First, what type of POA is given defines the level of authority conferred to the holder. Second, depending on the type of POA given can create significant tax implications for all those involved. For IRS purposes, when the holder receives a general power of appointment over property, the property is included in the holder's taxable estate. When the holder receives a limited power of appointment, generally, there are no estate tax consequences for the holder.

A general POA is one which allows the holder of the power to appoint to the holder, the holder's, the holder's creditors, or the creditors of holder's estate the right to have the beneficial use and enjoyment of certain property covered by the power of appointment. In non-legal terms, the holder has full enjoyment of the property, thus, the holder of the general POA is treated by the IRS for estate tax purposes the "owner" of the property subject to the power. The holder is the "owner" even if the power is not exercised. The property which is subject to the power is includable in the power holder's estate for estate tax purposes. Thus, it is important to calculate the taxable estate for a holder to determine if the power might cause the holder's estate to incur estate tax liability because of the POA granted.

A special POA allows the holder to distribute the designated property among a specified group or class of people. However, under a special POA the holder, holder's estate, creditors of holder, or creditors of holder's estate cannot receive the property, otherwise, it is a general POA. For example, a testator might grant his sister the special power to distribute property among the testator's three children. The sister would then have the authority to choose which of the testator's children gets which property. Under certain conditions the property can be used to benefit the holder, provided the distributions are limited based on "ascertainable standards" related to the holder's health, education, maintenance or support. What an "ascertainable standard" can be a topic on its own.

Further, a special POA may be exclusive or nonexclusive. If the special POA is exclusive, the holder can appoint all the property to one or more members of the class of permissible appointees to the exclusion of the other members of the class. If the special POA is nonexclusive, the holder must appoint some property to each member of the class.

One last issue to be aware of is to ensure that there is some type of fallback provision in the document creating the POA. If a POA is not exercised, the default provision of the document that created the power takes over.

Powers of Appointment provide for additional flexibility in an estate plan but must be carefully written to avoid any potential tax implications that do not create unforeseen issues for the holder of the POA.

Basics of Estate Planning: What are Slayer Statutes?

If you are a fan of TV crime dramas, like Castle or CSI, you know one of the fallback plots for an episode is to have someone kill a family member allowing that person to collect their inheritance sooner than if the family member died later on of natural causes. Unfortunately, these types of cases appear in real life more regularly than you would think. Recently, an Arlington County Circuit Judge sentenced a son to life in prison for hiring two men to kill his father because the son needed money to pay off debt. Yes, the story is even sadder when you realize that the father was also terminally ill.

Trying to avoid those temptations, many states have what is known as "slayer" statutes that prevent a person convicted of murder from collecting the inheritance the slayer would normally receive if the decedent had not died from the slayer's actions. In short, the community doesn't want slayers from "profiting" from killing someone and this article will get into more of the reasoning behind that.

Section 2-803 of the Uniform Probate Code provides guidance on the effect of homicide on intestate succession, wills, trusts, joint assets, life insurance, and beneficiary designations. The answer is not what the killer would have hoped. Under 803, should an individual be found to have feloniously and intentionally killed the decedent, the slayer forfeits all benefits from the decedent's estate, "including an intestate share, an elective share, (or) an omitted spouse's or child's share," among others. Should the victim have died intestate, the estate would then pass as if the slayer had disclaimed their share. The slayer's share would either go to the slayer's children, or be spread more across the slayer's generation depending on the family situation and intestate provisions.

The key is that it must be felonious and intentional. Section (g) of 803 of the Uniform Probate Code defines felonious and intentional as being a "judgment of conviction establishing criminal accountability for the felonious and intentional killing of the decedent" that "conclusively establishes the convicted individual as the decedent's killer." With a conviction of the slayer, an interested person can petition a court whether the slayer "would be found criminally accountable for the felonious and intentional killing of the decedent." This prohibits an heir from being disinherited due to accidental death caused by the slayer, like a car accident, or other negligent/accidental act.

In October of 2013, after relying on common law legal decisions, the Maryland legislature updated their "slayer" statutes codifing the idea that a person is disqualified from inheriting if they feloniously and intentionally kill, conspire to kill, or procures the killing of the defendant. Thus, not only is the actual slaying of the decedent included, so is bringing about that slaying. This seems to reinforce the idea that because the death would not have come about without the acts of the murderer, they should be disinherited. This statute also included the ability to hold a civil proceeding to disqualify someone, even if they are not found guilty, so long as the suit is brought either within 3 years of the decedent's death, or within one year that criminal charges are filed against the alleged killer. Though they have not updated their "slayer" statutes recently, Virginia (VA Code Section 64.2-2500 et seq.) and D.C. (D.C. Code Section 19-320) have similar provisions inhibiting a "slayer" from inheriting from their victim's death.

Estate of the Month: Dean Smith

After compiling a record of 879-254 over 36 seasons, former North Carolina Tar Heels basketball coach Dean Smith died on February 7th, 2015, at 83 years of age. Smith coached the the Tar Heels from 1961 to 1997, and retired as the winningest coach in college basketball history (he has since been passed by Mike Krzyzewski, Jim Boeheim, and Bob Knight). Along the way he won two national championships, 13 ACC Tournament titles, went to 11 Final Fours, won an NIT championship, and coached team USA to the gold medal at the 1976 Summer Games . In addition to his on-court accomplishments, Smith also was selected as Sports Illustrated's Sportsman of the Year in 1997, won the Arthur Ashe Award for Courage, and in 2013 received the Presidential Medal of Freedom Award. Ironically, in 1991, he became the first, and is still the only, basketball coach to be ejected from a Final Four game . Smith was also inducted into the Naismith Memorial Basketball Hall of Fame in 1983 and the National Collegiate Basketball Hall of Fame in 2006. Of the players he coached, more than 50 of them played professionally in either the United States or abroad, and more than 95% percent of his lettermen earned their college degrees.

The consummate father figure, Smith remembered his players in his estate planning documents. Smith, when drafting his estate plan, created not only a will, but also a revocable trust, called the Dean E. Smith Revocable Trust. Within that trust, Smith had a bequest made to his former players. Normally the terms of a trust are private, but, thanks to social media, we were able to get a glimpse into one aspect of Coach Smith's trust. On March 16th, a letter was written from the accounting firm Miller, McNeish & Breedlove, PA to all former UNC Varsity Basketball lettermen Smith had coached over 36 seasons. The letter was written by Tim Breedlove, an accountant with the firm and the trustee of Smith's trust. Breedlove wrote the players that Smith had included a bequest to each of them in his trust. The bequest was a check for $200, with the message "enjoy a dinner out compliments of Coach Dean Smith." Approximately 180 were mailed out as of mid-March, though Mr. Breedlove noted some addresses were still being tracked down. Though some players, like Brad Daughtery admitted they wouldn't cash the check but frame it in remembrance to Smith. While other players, like Serge Zwikker would likely donate the check to a charity in Smith's remembrance.

There are several advantages to setting up a trust like Coach Smith. The first is that the bequests are private (though this may be a bad example), something which Mr. Breedlove suggested was Coach Smith’s reason for creating the trust. Unlike a will, which must be published, all that is known of a trust is what is placed in them by a will, thus making it an ideal asset vehicle for someone who prefers their privacy. Along with this, the funds are removed from the probate estate, and thus not subject to the probate process, allowing for a more simple disbursement of the estate. Finally, for trusts like Coach Smith’s that are revocable, should you decide to change the beneficiaries of the trust, what their bequest is, or what conditions apply to it, or even cancel the trust entirely, you are able to do so easily.

Dean Smith was remembered as an impeccable coach and teacher by his players. Even, in death, he continues to teach his players on the importance of having a good estate plan in place.