Q: I am planning to create a trust to benefit my husband and our children after my death. But what if the laws change, or my family's financial situation changes? How can I plan for this?
A: When you sign a trust, you cannot predict your family's future personal or economic circumstances. One technique to address your concerns is including in the trust a provision that, after your death, grants your husband a "power of appointment." This means the person you name will be able to "appoint" or direct the distribution of the trust assets, so it can adapt to changing circumstances. The power can be a lifetime or testamentary (at death) power.
Let's consider one scenario to show how this works.
You grant a testamentary power of appointment to your husband in favor of your children, authorizing him to appoint assets, equally or unequally, outright or in trust, to any of them. If he doesn't exercise the power, all of the assets will be given to your three children in equal shares. Years later:
Child No. 1 went to graduate school and has a great paying job.
Child No. 2 becomes a teacher and and has a decent salary.
Child No. 3 has developed a substance abuse problem and is in treatment.
In this situation, your husband should exercise the power of appointment. He does this by including a provision in his will, referencing the power of appointment. He may decide that Child No. 1 does not need any (or as much) of the trust assets as the other children. He can either exclude Child No. 1 or appoint a smaller amount to Child No. 1 than an otherwise equal share.
Child No. 2 is doing well, so in his will your husband provides that her share be distributed to her outright.
It would not be wise to have Child No. 3 receive assets. Your husband provides that this child's share remain in trust. Later, if circumstances change, your husband can change the provision in his will.
For high net worth individuals, there can be significant tax benefits to including both general and limited powers of appointment in their trusts. For most of us (with less than $5,490,000 in 2017), there should be no estate or income tax consequences to the exercise of a power of appointment. I encourage you to discuss this with your estate planning attorney.
Originally published in the Union Leader (8/28/2017)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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