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Overlooked Issue In Many Estate Plans: Powers Of Appointment

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Technical but Common and Important

This is a bit complicated, but don’t dismiss this as it may very well affect your estate plan and the planning for your heirs and loved ones. This is an issue for lots of folks, not only the uber wealthy. Nickel bet says you probably have not addressed it.

Trusts are ubiquitous in estate planning. Lots (really lots!) of those trusts include what legal folks call “powers of appointment,” which we’ll explain in a minute. These rights appear in lots of trusts or wills. If your spouse died and left a marital trust (e.g., a QTIP) or a Credit Shelter Trust (sometimes called a bypass trust or family trust) those trusts might give you a power of appointment. If you or a family member created a trust for children, grandchildren or the commonly used life insurance trust (sometimes called an irrevocable life insurance trust or “ILIT”) each of those trusts might have one or even several powers of appointment. Did you create the commonly used spousal lifetime access (“SLAT”) trusts in 2020-2022 when there were fears that the estate tax rules might be changed? Those almost assuredly have powers of appointment. Did your parents or other benefactors create a trust for you or your family? That too may have powers of appointment.

Power of Appointments Explained

A power of appointment is a power or right given to a specified person, called the “powerholder” to direct where trust assets may be distributed. These powers are important as they may be used to revise distributions provided for in a trust when they exist. There are tax and legal constraints that may affect when such powers can be given, to whom they can be given, and how broad they can be. So, each trust may have different powers if any in fact were provided for. It may be important for you to address these powers to determine whether you might exercise them. Powers are generally, but not always (depending on the terms of the power itself) exercised by adding an express clause in the powerholder’s will exercising the particular power if that is desired. If you created irrevocable trusts in recent years your family members who may have been given such powers should review each power in each trust and consider specifying in their wills whether or not each of those powers were exercised.

I Never Thought I May Have a Power of Appointment

Of course not. Its complicated stuff. Even though tax attorneys get really excited over stuff like powers of appointment, when was the last time you heard someone at a cocktail party talking about them? If the trust was created by a general practice attorney they may have tailored a trust form for you or whoever created the trust and not even known that the form they used had a power of appointment in it. Even if a specialist created the trust, and even if they explained the existence of the powers of appointment in detail to the person creating the trust, that attorney may have never represented, or even met, the person holding the power of appointment. So how would they know? This is really critical and the reason most powers of appointment may be overlooked. Here’s a series of simple examples to illustrate.

Example: Grandma creates a trust for her daughter and granddaughter. Grandma’s attorney includes a limited power of appointment to daughter that permits daughter to appoint the trust assets into a different trust to benefit granddaughter and charities. On daughter’s death Grandma’s attorney drafted a power of appointment that gives granddaughter the right to appoint trust assets to anyone she wants other than granddaughter’s estate, creditors or creditors of her estate. The rationale for this is that this gives granddaughter the widest latitude to direct the money where she wants but by avoiding her creditors, estate, etc. the assets will remain outside the estate tax system forever (unless Congress changes the law). Grandma chose to give granddaughter a broader power than she gave daughter as she wanted to make quite sure that the money in the trust passed to the granddaughter. But her granddaughter is single, and has no children and may never marry or have kids. So Grandma wasn’t concerned about passing the assets on to anyone in particular after granddaughter.

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Example: When granddaughter goes to an attorney to create an estate plan for herself, she may not even know that the trust Grandma created even exists. Granddaughter, even if she knew a trust existed, may be in an awkward position to ask her mother, or even her grandmother, for a copy of the trust. Without a copy of the trust document, granddaughter’s attorney will never know that she held a broad limited power of appointment to appoint some mega-bucks to her friends. So you see the issue, your attorney might have to go on a bit of a treasure hunt to find out if you have powers of appointment that should be addressed in your will.

The planning moral of this story is that it really can be beneficial to make sure that people who are beneficiaries of trusts you create should at some appropriate point in their lives and yours be given copies of not only trust documents, but ideally a letter explaining key points in the trust and planning, so that they can monitor the trust administration.

Example: Let’s continue the above example. Daughter goes to her attorney to prepare an estate plan. Her attorney is sharp and asks for copies of any trusts that daughter may be a beneficiary of. Daughter is a pack rat and has copies of every trust from which she might benefit. Daughter assumes that since the trusts are irrevocable, and have been around a long time, that there is no relevance to her attorney looking at them. What was really going through daughter’s mind was that each of the six trusts her mother and other family members have created is 60-100+ pages long, and that her attorney bills at $1,000/hour, and golly that will be a whopper of a legal bill for her attorney to analyze each of these trusts. So she declines. The incredible flexibility and tax and legal advantages that could be afforded by the various powers of appointment in the gaggle of trusts daughter benefits from are all ignored.

Example: Daughter, worried about a big legal bill, tells her financial adviser that she has six irrevocable family trusts that she is a beneficiary of, or under which she is a powerholder, and asks whether the adviser can review them since the adviser bills her an asset management fee and not for hourly work. The adviser uses software to evaluate the trusts and generates some slick summaries and graphics for each trust. These summaries are a great starting point. Daughter’s financial adviser recommends that Daughter and the financial adviser meet with Daughter’s attorney to review the trusts and summaries that have been generated. Daughter’s financial adviser made the right recommendation. Even though software can be used to evaluate legal documents and generate summaries, the technology may not identify the nuances of powers of appointment and, for now, legal help may be essential to identifying these opportunities.

Why Is It So Important for you to Understand and Address Powers of Appointment?

If you or someone has been given a power of appointment over assets in an irrevocable trust, you might be able to shift the value of those assets to yourself or people you choose. You effectively can rewrite a trust. That is so important because the world changes, circumstances change, and tax and other laws change. Whatever the creator of the trust (settlor, trustor, donor) had in mind when they created the trust may no longer be an optimal use of those trust assets. The exercise of a power of appointment that may exist in that trust document might be able to change what is currently provided for to something much better.

Powers of Appointment – A More Detailed Definition

The following is a deeper dive into the definition of a power of appointment and will introduce you to some of the legal jargon you might encounter when you sort out whether you have any powers and what to do about them.

A power of appointment (“POA”) is a right, granted under a legal instrument such as a will or trust, by a person referred to as the “donor,” to a person (or persons, charities, creditors, etc.) referred to as the “donee” or “powerholder.” This right empowers that powerholder to designate who should receive interests in certain property, called the “appointive property” subject to the POA. The person or persons who are eligible to receive the appointive property is called a “permissible appointee(s).” Although the powerholder can designate those who receive beneficial ownership interests in the appointive property, the powerholder does not own the property. If the powerholder does not exercise the power the appointive property may pass to a default person indicated in the POA called the “default taker.”

Depending on the characteristics of the POA, it may result in the appointive property being included in the powerholder’s gross estate, or not, and it might result in a gift tax consequence, or not. POAs can also have significant income tax planning implications. This stuff is complicated and you want to talk to your tax adviser when you create a trust or if you are considering exercising a power of appointment.

POAs are granted by a third party. You generally don’t create one for yourself. Although you may reserve a limited power of appointment if you create a particular type of trust that does not trigger gift tax (an “incomplete gift trust”).

POAs are a flexible and versatile tool that can be used to accomplish a variety of planning goals. Their common usage belies the incredible complexity and potential traps for the unwary when planning with POAs.

Sample Powers of Appointment Clauses

Let’s take a look at a sample power of appointment and then explain it to better help you understand the concept. Bear in mind, powers of appointment come in more than 31 flavors so you cannot ever assume “seen one seen all.” Each trust, and every power in each trust, may have their own nuances.

Article IX.D.1, page 7 provides the following power of appointment:

“Upon the Beneficiary’s death, the property then held in his or her trust shall be distributed to such one or more persons out of a class composed of the Grantor’s descendants (other than the Beneficiary) and surviving spouses of the Grantor’s descendants on such terms as the Beneficiary may appoint by a Will or other signed writing that is acknowledged before a notary public specifically referring to this power of appointment or, in default of appointment or insofar as an appointment is not effective [the trust then provides where assets pass if the power of appointment is not exercised].”

This sample power of appointment above lets the beneficiary appoint assets to grantor’s descendants or the spouses of grantor’s descendants. The reason the settlor creating this trust broadened this power to include not just the beneficiaries descendants (which some powers of appointment do) but any descendants of the grantor, the father of the beneficiary, was that the beneficiary is currently in her 20’s and has no children. So in this way she can appoint assets of the trust to future children or if none to her siblings or nieces and nephews. This particular grantor wanted to let her children appoint to their spouses. Many people setting up trusts do not permit that, out of fear of divorce of a child dissipating assets, so they limit the power of appointment to the blood relatives.

Let’s look at another illustration of a power of appointment.

Article IXX.B.3, page 27 provides the following power of appointment:

“Trust assets shall be distributed to such one or more persons (including the Beneficiary’s estate) on such terms as the Beneficiary may appoint by a Will or other signed writing that is acknowledged before a notary public specifically referring to this power of appointment provided that, in the case of a GST Exempt Trust and the ”Limited Share” of a GST Non-Exempt Trust, no appointment shall be made to the Beneficiary, the Beneficiary’s estate, the Beneficiary’s creditors or the creditors of the Beneficiary’s estate; or, in default of appointment or insofar as an appointment is not effective….”

A few points on the above illustrative power. The first portion of this power permits appointments to anyone including the beneficiaries estate. So this is a broad and the beneficiary could appoint to anyone. The reason the beneficiary’s estate is included is that this avoids imposition of the generation skipping transfer tax on assets that are not exempt from that tax. That is a complicated, but common planning technique. The provision continues on to prohibit appointment of trust assets that are exempt from the GST tax to the Beneficiary, the Beneficiary’s estate, the Beneficiary’s creditors or the creditors of the Beneficiary’s estate. These are the specific recipients who must be excluded to avoid the assets in the trust that are exempt from the GST tax from being pulled into the beneficiaries estate. This is also a common approach to preserving tax benefits of assets in a trust and where the grantor setting up the trust is willing (many are not) to let a beneficiary appoint to anyone (i.e., a broad class of beneficiaries).

The above illustrations are only a few of the many variations of powers of appointment but illustrate that powers can be broad or narrow depending on what the person creating the power feels appropriate, and the important tax considerations that can affect the terms of a power.

What To Do: Take a Power Inventory

What you need to do for your estate plan is to get copies of every trust that you might be named in as a beneficiary or even just a powerholder. Note that you do not have to be beneficiary of a trust to hold a power of appointment under the trust document. In fact, many powers of appointment are specifically planned to be held by someone who has no other interest or role under a trust document. Once you get all the trust documents that might provide you with a power of appointment, have your attorney review them and inventor each trust instrument. Here are some of the factors to summarize in the inventory:

· Name and date of the trust document.

· Whether or not the trust provides you with a power of appointment. It is worth noting even trusts that do not provide a power of appointment so that your listing is complete and in the future no one spends the time and money reviewing the same trust document to determine whether it has a power.

· The page and article number that provides you with a power of appointment.

· A summary of what the power of appointment permits. This is especially helpful for laypersons so that they can quickly determine whether the power might be exercised.

· What the terms of the power are. It is perhaps advisable to copy the actual language of the power of appointment into your power inventory so that the precise language is available if in the future you choose to exercise that power. That can be a real time saver especially if there are a large number of trusts, wills or other documents that create powers for you. That will save the time from having to revisit each instrument to identify the specific terms. This is also suggested because a power of appointment should be exercised precisely as the power itself requires. So having the specific language at hand could be important to assure proper exercise.

· A current recommendation as to whether and how you might exercise the power. You might also have your power inventory explain the reasoning for the current recommendation. That will make it easier to update the recommendations in the future as circumstances change.

What Should You Include in Your Will

As noted above, you will want to exercise the powers you choose to exercise as each power of appointment specifies it should be exercised. This will likely be in your will. Some advisers recommend that if you do not choose to exercise any powers of appointment you include a statement to that effect in your will. For example, you might state in your will: “I hereby state that I do not, by the terms of this my Last Will and Testament, exercise any power of appointment.” This type of statement might avoid general bequests in your will from inadvertently exercising a power of appointment. If you have a specific power of appointment that you choose to exercise your will should expressly refer to the specific power of appointment by naming the document that created the power of appointment, the section or article of the will or trust that created the power, and that you intend to exercise it, and how you exercise it.

Example: Here is how the child/beneficiary of the trust containing the power of appointment in the preceding example may exercise it in her will. “I have been provided a power of appointment under the trust document titled: “Trust for Jane Doe” dated June 5, 2020, Article IX.D.1, page 7. I hereby exercise that power of appointment and appoint all such assets governed by this power to the “Family Trust” provided under article XX of this my Last Will and Testament.” The will in which this is exercised should be notarized as required in the power itself. While the power can be exercised in an “other signed writing” in this illustration it is exercised under the powerholder’s will.

You might also discuss with your attorney including a reference in your will to the specific powers you choose not to exercise so that they are “on the radar.” That way, each time you revise your will you’ll be reminded specifically to review and consider each power of appointment you hold.

Conclusion

Powers of appointment can be a powerful estate and wealth transfer planning tool. Because of the manner in which powers of appointment are created and the risks that the persons holding the powers may overlook them, everyone signing a will should consider this issue.

Finance

Medifast Still A Growth Stock But Now Value Priced

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Medifast is a growth company that is sporting some attractive value-stock metrics after its shares have fallen to a level that is “simply ridiculous” when measured against its prospects, according to Taesik Yoon, who edits the Forbes Special Situation Survey and Forbes Investor newsletters. The diet business’s equity has suffered with growth shares in general as elevated inflation and aggressive Federal Reserve monetary policy to combat it have caused investors to rethink stocks that benefit from an expanding economy.

A slide of roughly 40% in the past year undervalues a growth story that is taking a hit now but remains intact over the longer term, says Yoon, making the stock a bargain. Yet despite also having a fantastic balance sheet with more than twice as much cash on hand than total debt and paying a very generous dividend that is now yielding almost 5%, Yoon says, Medifast’s stock currently trades at less than 12 times its earnings expectations for the year versus a five-year average of 19.4. That might make sense if you expected the current earnings swoon to persist, but Yoon thinks the secular trend toward healthier living and the company’s coach-based business model will have its earnings back on the rise soon, outpacing the market.

Medifast combines an extensive menu of proprietary nutritional products to help with diet goals and a network of almost 64,000 independent coaches. Most of these are former customers who achieved their weight-reduction goals and are compensated from the sales of company products to their clients. Medifast delivers its food regimens to customers, which aided revenue during the pandemic lockdowns and helped earnings growth accelerate by an average 53% over the past two calendar years. That drove its shares to a record $337 in May 2021, but they have lost more than half of that since. Still, even accounting for the risk of an economic slowdown, Yoon expects Medifast’s heavy spending to improve its technology and distribution infrastructure, which could help raise annual sales to more than $2.5 billion, up almost $1 billion from 2021.

Yoon sees long-term profit growth in the double digits, in line with expected sales gains and with operating margins in the mid-teens.

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How One Founder Is Helping DIY Investors Navigate Risk

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August 14 is National Financial Awareness Day, and I had the opportunity to chat with John Duffy, founder of Trending Stocks, who went from personally absorbing the 2000 and 2008 market crashes to launching a risk-adverse stock market platform for DIY investors. Here, I chat with Duffy about trend following and investment risk management.

WHAT GAVE YOU THE IDEA FOR TRENDING STOCKS?

It took me 14 years to “get even” after two huge downturns in the stock market – first in 2000 (down 50%) and then in 2008 (down 56%). Losing 14 years of investing time and money was the impetus for me to research a better way in the market. I learned about the ancient trend following strategy – and while it worked well – there was no simple software or program to apply it. Spending hours upon hours charting and graphing doesn’t interest anyone, so I programmed and launched TrendingStocks.IO to automate the research time and hassle on the backend.

HOW DOES IT HELP INVESTORS AVOID RISK?

The trend following strategy inherently has a focus on risk management, so I applied that into the new platform. The risk management helps investor avoid riding the market down. You pre-set a fixed stop-loss amount based on your personal risk tolerance. As a stock goes up, which it should based on the trend following strategy’s identification, so does the stop-loss amount; it rides up. While the stop-loss amount fluctuates up and down causally with the stock, if it gets down far enough to cross below a bottom threshold – we flag you to sell and get out.

WHAT’S YOUR BACKGROUND?

Aside from studying finance, economics and business, I’m a Vietnam Navy Veteran. Oddly enough, this was my foray into programming and coding. I bunked with the first IBM IBM programmers in the world. Their expertise interested me, so I asked a bunch of questions and they taught me the science.

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Not to date myself, but this was before when computers could be owned, only leased. IBM recruited me to program after the war, so I entered as one of few who had learned how to program back then.

IS THIS FOR DAY TRADERS OR DIY INVESTORS?

This is definitely not a day-trading solution. Trending Stocks provides analysis at the end of every business day and therefore, it’s not suitable for day trading. It’s after-hours based.

The tech is suited for a long-term, DIY investor and anyone who’s a newbie or wants to get involved in the market. Aside from managing risk, being a diligent trend follower helps with wealth growth over time.

Once an individual has confidence they’re working with good investable trends and a solid risk management process, it’s an easy plan to follow and platform to supplement that plan.

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Entrepreneurship

Difference Between CFD and Shares

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Contracts for Difference (CFD) trading and share trading vary primarily in that when you trade a CFD, you speculate on a market’s price without acquiring ownership of the underlying asset, but when you trade shares, you must do so.

The main distinctions between a share and a CFD are ownership and leverage. You become the owner of the shares when you purchase shares. Investing in shares is equivalent to acquiring a modest ownership share in a business you support. You must pay the whole share price when purchasing stock shares.

CFDs vs shares

Contract for Difference is referred to as CFD. Without holding the underlying asset, you can speculate on the price of a security by engaging in online CFD trading. A stock, stock index, currency, commodity, or cryptocurrency might all be the underlying security for a CFD. With CFDs, you may join a trade with a lower initial investment because they trade on leverage.

Trading CFDs involves taking into consideration leverage and margin, fees and charges, instrument categories, going short, and asset ownership, which is one of the primary difference between CFD and share trading. Let me elaborate more.

What are Leverage and Margin?

Leverage and margin go hand in hand when trading CFDs. By using leverage, you may acquire exposure to an underlying asset without having to put down the whole amount of money needed to purchase and hold the real asset; instead, you just have to contribute a portion of the position’s overall worth.

The amount you must initially have available to begin a position, known as margin, fluctuates based on the contract size and the underlying asset you want to trade. Margin is not a cost. Based on the pre-determined leverage for the asset class, the first margin need is expressed as a percentage of the contract value. Risk is increased while trading on margin.

When you trade on the Invest trading platform, you must have the full asset value accessible, and you buy shares without applying leverage to your available funds.

Variety of Assets

You may trade on more than 2500 different assets on the Traders Union CFD platform, including shares, forex, commodities, indices, cryptocurrencies, ETFs, and options. You may do this to diversify your portfolio and get exposure to major exchanges across the world.

The Invest trading platform is a marketplace where you may buy and sell stocks and ETFs (ETFs). You may purchase and hold shares of your favorite businesses or any listed ETF on the platform, as well as benefit from the newest IPOs when firms go public, thanks to your access to over 1200 equities and 90 ETFs.

Asset Ownership

You may acquire exposure to an underlying asset, such as Gold (XAU), Apple (AAPL), or EUR/USD, without really holding it by using a CFD. Due to changes in the underlying asset’s price, you will either gain or lose money. The goal of CFD trading is to bet on changes in an underlying asset’s price. The size of the stake and price changes determine any profit or loss.

In contrast, when you purchase a stock on the Invest trading platform, you become the owner of the physical asset and look for a potential longer-term rise in the asset’s value before selling it.

Trader doing CFD trading

A Little More About How CFDs Can Differ From Investing

If your position remains open overnight while trading CFDs, you will be charged an overnight fee. While CFD trading is frequently utilized to speculate on near-term events like earnings announcements or the release of U.S. data reports, stock trading is typically favored for constructing portfolios.

In summary, both CFD and share stock trading offer benefits and drawbacks, and both let you profit from price changes that might result in either a gain or a loss. You should be able to choose which Traders Union platform best matches your trading preferences after you have an understanding of your trading goals. Which trading platform—CFD or Invest—does best for you?

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