The lifetime power of appointment, automatically granted to the Grantor in the iPug, allows the Grantor to make certain changes to the iPug while the Grantor is competent and alive. Note, in a joint trust, each Grantor retains the lifetime power to appoint all assets, unless limited further in your drafting.
The language of the power of appointment allows the Grantor to do the following:
- Appoint the entire principal and any accrued, undistributed net income of the Lifetime Trust;
- Change the members serving on his or her disability panel; and
- Change the specific bequests, the residuary beneficiaries, and the amount, timing, manner or method of any distribution under said Trust.
The power of appointment must be exercised by Living Trust Agreement or any other written, notarized instrument, specifically referring to said power of appointment. The power of appointment for a married couple automatically excludes both Grantors (i.e. husband may not exercise power of appointment in favor of wife, and vice versa). Further limitations may be imposed if a married couple wishes to add remarriage protections; upon a remarriage event, you may select to keep the power of appointment, limit it to one-half of the Trust assets, or remove the power of appointment altogether if the surviving Grantor remarries.
One of the most beneficial uses of the limited power of appointment is the “friendly beneficiary” rule, most commonly used to “correct” a transfer for Medicaid purposes. If your client were to get money out of Trust to child, and child back to client, Medicaid may not see that as a corrective transfer. Or, maybe the client does not trust any of her five children to give the money back to her, or she does not want to exceed the federal gift tax exclusion amount.
I would suggest a partial revocation. In New York, the Grantor can partially revoke said Trust, so long as she has the consent of all her beneficiaries. Well this may be a hassle, since her five children live in Maine, Florida, Nebraska, Southern California and Washington State. Instead of having to get the consent of all of these children, she can use her retained power of appointment to modify her Trust to one beneficiary – her friendly grandson who lives right down the road.
First, “Trust Modification 1 of 2” entails changing the lifetime income and principal beneficiaries, specific bequests, distribution of remaining tangible personal property, residuary beneficiaries, and ultimate distribution all to be her friendly grandson. Don’t worry! This is only temporary!
Second, we execute the partial revocation: a document stating Client wishes to take the amount penalized for Medicaid purposes from her Trust, and she does so with the consent of “all” her beneficiaries. She signs, and her friendly grandson who also attends the meeting signs, allowing her to give the money back to herself directly. Remember, he is now the sole beneficiary!
Lastly, and possibly the most crucial step: “Trust Modification 2 of 2” changes the Trust back to the way it was (i.e. back to all five children equally, and maybe add a small specific bequest to friendly grandson for his help). Change all of those sections back to the way they were originally, and the client is on her way.
As always, be sure to check your statutes to make sure all of the above is copasetic within the estates, powers and trusts laws of your state. It’s a nice alternative for clients who are hesitant to gift a bunch of money to their children.
