In my experience as an estate litigator in the field of family trusts I have seen one clause that has caused more unwitting catastrophes than any other — that clause is called a “power of appointment.” A “power of appointment” is the power to name who gets what after the first spouse dies.
Here’s a common situation. Husband and Wife are in their second marriage, both have grown kids. They do a trust which has a clause that provides that both sets of kids share equally. But, buried somewhere else in the trust, there is a confusing and often innocuous looking clause that provides the surviving spouse with a power of appointment over all gifts after the first spouse is gone. Let me be blunt. Step-parents can be very cruel to the children of their deceased spouse and with the power of appointment they have authority to cut them out entirely and give it all to their own kids.
Often when I get a litigation case where step-kids are being cut out by their step-parent there is a lot I can do. Usually there is some sort of trustee breach happening. After all, a trustee’s job is to be fair. But, if there is a power of appointment giving the surviving step-parent authority to direct who gets what, they can do whatever they want.
Every time I see a power of appointment I just KNOW the deceased parent was unaware of it. Yes, it does happen that some people actually want their surviving spouse to have a power of appointment to direct the gifts, but it’s rare. Usually the deceased person thought that since it was stated that their kids gets half, and because the surviving spouse has ethical duties to act fairly as a trustee, that the matter was bolted down — that their kids would for sure get half. Not if there is a power of appointment lurking somewhere else in the trust!
Beware powers of appointment and make sure that there isn’t one in your trust.