How to Save a Million Dollars

Limited vs. General Power of Appointment. As a Portfolio Manager for professional trustees, I am often asked what sets us apart from our competition. Here's a recent example that might be helpful. Robert, an Estate Planning professional, had a client—Caroline (age 86)—who was looking for a new trustee. He requested an Investment Proposal. With a copy of the trust and account statement, we went to work.

This Generation Skipping Trust paid Caroline, a child of the Grantor and beneficiary of this trust, all net income. The principal passes to her children upon her death. The Trust states that she may change, within a very limited scope, who receives the Trust principal upon her passing, called a Limited Power of Appointment. Because she did not have “Dominion and Control” over these assets, they are not included in her estate for estate taxes and not stepped-up in basis at her passing.

One asset of the Trust stuck out: Oil & Gas Property: Basis $0, current market value $3.6 million dollars. “Fracking.” Importantly, no stepped up in basis means a huge tax bill is coming when the property is sold.

Many states allow Irrevocable trusts to be modified if the primary purpose of the trust is not changed. With this insight from us, Caroline modified the trust, making the Limited Power of Appointment a General Power of Appointment. This gave her assets a step-up in basis and eliminated the tax on a $3.6 million gain. With the step-up, Caroline’s children could sell the property tax free, saving over $1,000,000.

To see the laws in your state, visit the ACTEC site.

You may also request a copy of our “How To Read a Trust” and Trust Worksheets.