Definition
A power of appointment is the legal authority granted under a will or trust that allows someone (the donee) to decide how trust assets are distributed among beneficiaries, including the discretion not to distribute them at all.
Unlike discretionary trusts where trustees must eventually distribute assets, a power of appointment is genuinely optional. This flexibility makes it valuable for responding to future circumstances that can't be predicted when establishing the trust.
What Does Power of Appointment Mean?
A power of appointment is an express power that must be explicitly drafted into a trust deed or will—there is no statutory default power under UK law. The person who creates the power (the donor or settlor) grants it to someone else (the donee), who then has authority to decide whether and how to distribute trust property among a specified class of potential beneficiaries.
According to HMRC guidance (IHTM42223), the critical distinction is choice: "A power of appointment gives the donee the choice of whether to exercise their power or not." This differs fundamentally from a discretionary trust, where trustees have discretion about who receives what and when, but they must act. Under a power of appointment, the holder can choose to leave the trust completely untouched if they believe that serves the beneficiaries' best interests.
The Perpetuities and Accumulations Act 1964, Section 7, distinguishes between two main types of powers. A general power allows the holder to appoint trust property to anyone, including themselves or their own estate. Most powers in family trusts are special powers, which contain restrictions—typically the donee cannot benefit themselves, or appointments must be made within a defined class like "my children and their descendants only."
When Sarah's will creates a trust of £500,000 with her daughter Emma holding a general power of appointment, Emma can decide at any time to appoint the assets to herself, her own estate, or others. However, HMRC treats Emma as effectively owning the trust assets for inheritance tax purposes, which limits the tax planning benefits. More commonly, David establishes a £750,000 trust for his three children and appoints his brother James as trustee with a special power. James can decide which children or grandchildren benefit and in what proportions, but cannot appoint funds to himself or anyone outside David's bloodline. Crucially, James can also decide not to exercise the power at all.
Powers of appointment typically require exercise by formal deed of appointment. The validity test established in Re Gulbenkian's Settlement [1970] AC 508 requires conceptual certainty—the court must be able to determine for any given individual whether they are or are not within the class of potential beneficiaries. This "is or is not" test ensures the power can be properly administered without requiring a complete list of every possible beneficiary.
The practical value becomes clear in Margaret's situation. Her will creates a discretionary trust of £1 million with a power of appointment for her trustees. When her son faces a contentious divorce 10 years after her death, the trustees choose not to exercise their power to appoint capital to him, protecting the funds from potential claims. Five years later, when his circumstances stabilise, they exercise the power and appoint £200,000 to help him purchase a home. This flexibility to respond to actual circumstances rather than predetermined distributions is the power's greatest strength.
Common Questions
"What's the difference between a power of appointment and a discretionary trust?" The key difference is obligation. Discretionary trust beneficiaries can enforce trustees' duty to exercise discretion and make distributions, even if trustees have wide latitude about who benefits. With a power of appointment, beneficiaries have no enforceable right to compel the holder to act. The donee can decline to exercise it entirely, and no beneficiary can successfully sue to force distribution.
"Can I give myself a power of appointment in my own trust?" Yes, but this creates a general power of appointment, meaning HMRC treats you as still owning the trust assets for inheritance tax purposes, defeating most tax planning benefits. It's more common to give a special power to independent trustees or trusted family members, offering tax advantages while maintaining flexibility for beneficiaries.
"Why would I use a power of appointment instead of naming specific beneficiaries?" Powers of appointment provide flexibility for unpredictable circumstances. If you have three children but can't foresee which might face financial hardship, addiction, divorce, or special needs in 20 years, a power lets trustees make distribution decisions based on actual future circumstances rather than today's guesses. This is particularly valuable for larger estates or trusts spanning multiple generations.
Common Misconceptions
Myth: A power of appointment is the same as giving trustees discretionary powers in a trust.
Reality: While both involve discretion, they're legally distinct concepts established in Re Gulbenkian's Settlement [1970]. A discretionary trust imposes a duty on trustees to exercise their discretion and distribute property eventually. A power of appointment is genuinely optional—the donee can decline to exercise it entirely. Beneficiaries of discretionary trusts can sue to enforce trustees' duty to act, but beneficiaries under a power of appointment have no such enforceable right.
Myth: If I give someone a power of appointment, they can just take all the money for themselves.
Reality: Only a general power of appointment allows the holder to appoint assets to themselves. Most powers in UK family trusts are special powers with explicit restrictions—typically the donee cannot benefit themselves or must exercise the power within a defined class such as "my children and their descendants only." Additionally, anyone exercising a power owes fiduciary duties, meaning they can be held legally accountable for self-dealing or improper use.
Related Terms
Understanding Power of Appointment connects to these related concepts:
- Trust: A power of appointment can only exist within a trust structure or will trust, providing flexibility within that framework.
- Trustee: Trustees are the most frequent holders of powers of appointment and owe fiduciary duties when exercising such powers.
- Discretionary Trust: Powers of appointment are often confused with discretionary trust powers but differ fundamentally in being optional rather than mandatory.
- Beneficiary: The class of people who may benefit if a power is exercised, but who cannot sue to compel its exercise unlike discretionary trust beneficiaries.
- Fiduciary Duty: Holders of powers of appointment owe fiduciary duties to potential beneficiaries, constraining how the power can be exercised.
Related Articles
- What Is a Trust? (And How Do They Work in Wills?): Essential foundation for understanding the trust structure within which powers of appointment operate.
- Using Trusts to Protect Your Estate: Explores protective strategies where powers of appointment provide crucial flexibility to adapt protection to changing circumstances.
- Discretionary Trusts in Wills Explained: Clarifies the key distinction between discretionary trust duties and optional appointment powers.
- Appointing Professional Executors and Trustees: Guidance on selecting trustees capable of exercising sophisticated powers of appointment with proper expertise.
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Legal Disclaimer: This glossary entry provides general information about powers of appointment and does not constitute legal advice. Powers of appointment involve complex legal and tax considerations. Exercise of a power can have significant inheritance tax and capital gains tax consequences. For advice specific to your situation, consult a qualified solicitor or tax advisor.