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  • Home
  • About Tom
  • Estate Planning
    • How to Plan Your Estate (Start Here)
    • Revocable Living Trust
    • Inheritance Protection Trust
    • Financial POA
    • Health Care POA
    • Living Will
    • Asset Protection Planning in Arizona
    • Intro to Arizona Domestic Asset Protection Trusts
    • Asset Protection Exemptions in Arizona
    • Protect Home from Creditors in Arizona
    • Car/RV/Mobile Home Titling
  • Fees
    • Estate Planning Fees
    • Estate Administration Fees
  • Scheduling
  • Recent Law Updates
  • Office Info
  • New Client Forms
  • More Articles
  • Bouman Law Firm Blog
  • Probate & Trust Administration
    • How to Administer an Estate (START HERE)
    • Probate in Arizona
    • Small Estate Affidavit
    • Final Arrangements & Organ Donation
    • Trust Beneficiary Notices and Trustee Reports
    • Annuities
    • Debts of Decedent
    • Transfer Real Estate of Nonresident
    • Tax Filings for Estate
    • Duties of Trustee
  • Make a Payment
  • Buy a Book
  • Legal Disclaimers

BOUMAN LAW FIRM blog

Increase in Federal Estate Tax Exemption Affects Testamentary Power of Appointment

1/28/2018

 
Summary:  Increase in federal estate tax exemption affects testamentary powers of appointment.

If your estate plan includes an inheritance protection trust for a child or other beneficiary, the provision likely gives the beneficiary a testamentary power of appointment.  This permits the beneficiary, effective upon the beneficiary’s death, to redirect any remaining trust assets among individuals or charities of the beneficiary’s choice.  When avoiding estate tax is a major concern, it makes sense to limit the power of appointment in a manner that restricts the beneficiary from using trust assets to pay off personal debts.  This allows trust assets to pass to the successor beneficiaries free of estate tax, which is important for large estates.  But the limited power of appointment also prevents the successor beneficiary from getting a step-up in income tax basis, which can increase capital gains tax upon sale of trust assets. 

The current estate tax exemption, now dramatically higher than it was in 2017, eliminates the estate tax as a planning issue for all but the very wealthy.  This means it makes more sense to refrain from using limited powers of appointment in inheritance trusts.  Why?  The reason is because the value of potentially avoiding estate tax is outweighed by the more likely benefit of reducing income tax.

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    Thomas J. Bouman
    Attorney at Law
    Tucson, Arizona

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