Powers of Appointment In Asset Protection Trusts

Asset protection lawyers spend a lot of time thinking of inventive ways to shield assets.  Sometimes, however, the best solution to a problem is simply using an old tool in an new or innovative way.  A special power of appointment is one such tool.  Lawyers have been using powers of appointment for several hundred years, dating back to English common law, for purposes of protecting assets.

Modern asset protection lawyers can also make use of powers of appointment, but many fail to do so.  To understand the value of a power of appointment and how it can aid in wealth preservation, a few concepts need to be explained.

• What is a power of appointment as used in an asset protection trust?

A power of appointment is a right to say who the beneficiaries of a trust will be.  The person to whom that right is given is called the “donee.”  For example, say that you are creating a trust.  Rather than explicitly state who will be beneficiaries of the trust, you can confer a right to your spouse to make that decision at a later time.  In this case, your spouse would be the donee of a power of appointment.  She would have the right to “appoint” a person the beneficiary of the trust you created.

• Why would anyone use a power of appointment for purposes of asset protection?

We have discussed self-settled trusts quite extensively in the past, and we will elaborate upon them again in the near future.  A self-settled trust is simply a trust that a person creates for the benefit of him or herself.  For example, if you created a self-settled trust, you would be the beneficiary of that trust.  For purposes of this article it is enough to say that the general, traditional rule has been that a self-settled trust can be broken for to pay off creditors of the beneficiary.  In other words, if you create a trust and name yourself as the beneficiary, the general rule has been that your creditors can have the trust broken.

By using a power of appointment and naming yourself only as a potential beneficiary of the trust–as a person that the donee may (but is not required to) name as a beneficiary, the trust you created is no longer considered a self-settled trust.  Therefore, it cannot be broken by your creditors until such time as the donee names you as the beneficiary.

If you have questions regarding the use of powers of appointment, contact an asset protection lawyer at Lodmell & Lodmell.