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.
The default law in Arizona leaves inheritance outright and free of trust. However, if the beneficiary is incapacitated or under age 21, the Personal Representative or Trustee, as the case may be, will have discretion to distribute inheritance by any one or more of the following methods:
Option #1 Hold in temporary inheritance trust for beneficiary with all remaining assets distributed outright when beneficiary attains  years of age.
Option #2 Hold in temporary inheritance trust for beneficiary with assets distributed in stages by age. For example, 1/3 of trust assets at age , 1/2 of remaining assets at age , and all remaining assets at age .
Option #3 Hold in temporary inheritance trust for beneficiary with assets distributed in stages by time. For example, 1/3 of trust assets immediately, 1/2 of remaining assets  years later, and all remaining assets  years later.
Option #4 Hold in permanent inheritance trust for beneficiary with assets managed by an independent or professional trustee. For example, a trust for mentally-disabled adult beneficiary or beneficiary with substance abuse problems.
Option #5 Hold in permanent inheritance trust for beneficiary, but permit beneficiary to serve as trustee at any time after attaining age  or to name an independent trustee of the beneficiary’s choice.
For more information about inheritance protection trusts, check out this article.
Thomas J. Bouman