General Power of Appointment: How Does it Work and What Does it Do

A power of appointment in a trust allows the person with that power to appoint a beneficiary to the trust, as well as to take out existing beneficiaries. The power of appointment can be exercised by the person with that power either in writing to the trustee or in a validly executed trust. Typically, a trust will describe how its power of appointment works. If the language of the trust is not clear, then the way the power of appointment works is by default as described in NY Estates Powers and Trusts Law, NY Est Pow & Trusts L § 10-6.6. A trustee may give the power of appointment to themselves or to someone else. Typically, we find that a trustee gives a power of appointment to their spouse, to keep the kids in check.

Question: I’m a trustee for my mother’s or father’s irrevocable Medicaid trust. My mother or father are still alive, and they are upset at one of my brothers or sisters. Can they have that beneficiary removed from the trust or diminish their share?

Answer: The law does not give the trustee an automatic power to have a beneficiary removed from a trust. However, if a trust grants a trustee an option to exercise a power of attorney with a gift rider and the power of appointment to have a beneficiary appointed or have a beneficiary removed if the appropriate language is contained in the trust, then it’s possible.

The trust wording to allow the trustee to have a beneficiary removed from the trust is something similar to this:

The Grantor reserves the power, exercisable by written instrument delivered to the Trustees during the trust term, by making specific reference to, and exercise of, this power to appoint any part or all of the principal of the remainder of the trust fund at the end of the trust term, outright, or upon trusts, powers of appointment, conditions, or limitations, to one or more persons select out of a class composed of the Grantor’s issue. This power may be exercised by an agent under a duly executed statutory power of attorney and statutory gift rider.

The Grantor shall designate in the Grantor’s Last Will and Testament or any codicil thereto of any date, by making specific reference to, and exercise of, this power to appoint the remainder of the trust, in such amounts and proportions, for such estates and interests and free of trust or upon such terms, trusts, conditions, and limitations as Grantor may designate thereunder, to any one or more of Grantor’s issue.

In the event the Grantor shall fail to effectively exercise this power of appointment, then the remainder of the trust shall be assigned, transferred, and paid over as follows:

A Medicaid trust would also include a language such as this: The Grantors are prohibited from appointing themselves, each other, their estate, their creditors or creditors of their estate, their spouse, spouse’s estate, spouse’s creditors or creditors of spouse’s estate as beneficiaries of this trust.

In a trust, there can be either a limited power of appointment or a general power of appointment. Some trusts, especially irrevocable Medicaid trusts, are limited as to what kind of power of appointment it can contain.

This power of appointment with a gift rider is not a common thing to see in New York. We sometimes see it in a trust when a spouse gives the other spouse the power of appointment in order to keep their joint children in check. We also see situations where a stepmother or stepfather wants to have the stepchildren removed from the trust, in order to favor their own children. One has to be very careful before they decide to put a power of appointment into a trust, as it can have consequences such as their children being left out of the trust.

If you have a legal issue where a power of appointment in a trust is involved, you can call the Law Offices of Albert Goodwin at (212) 233-1233 or 212-233-1233.