Powers of Appointment Trust: General vs. Special, HEMS, and Creditors

A power of appointment trust is a trust that gives a chosen person, called the donee, the authority to decide who ultimately receives the trust property. The person who sets up the trust (the donor) defines how broad that authority is, and that single drafting choice drives nearly every tax and creditor consequence that follows. A “general” power lets the donee direct property to themselves and pulls the trust into the donee’s taxable estate. A “special” or limited power restricts the donee to appointing among other people and keeps the trust out. With the 2026 federal estate tax exemption set at $15,000,000 per person, the difference between the two can be the difference between a family paying nothing and owing 40 percent of the trust’s value to the IRS.¹

The People Involved

Three roles make the structure function. The donor (also called the grantor or settlor) creates the trust and decides who gets the power and how broad it is. The donee receives that authority and can direct trust property to someone else. The appointee is the person or group who ultimately receives the property when the donee exercises the power. The pool of people the donee is allowed to choose from, sometimes called the “objects” of the power, is defined by the donor in the trust document.

Every well-drafted trust also names takers in default. These are the people who receive the property automatically if the donee dies without acting, declines to use the power, or fails to follow the required formalities. Without takers in default, the property can end up in probate or distributed under intestacy rules, which is almost never what the donor intended.

Special (Limited) Powers of Appointment

A special power restricts the donee to appointing property only among a defined group of other people. The donee cannot appoint to themselves, their estate, their creditors, or the creditors of their estate. The donor typically limits the objects to descendants, named family members, or charities.

Because only general powers trigger estate inclusion under the Internal Revenue Code, trust property subject to a special power stays out of the donee’s gross estate entirely.² The donee is not treated as the owner of the assets, and exercising a special power is not a taxable gift. The donee is carrying out authority the donor granted, not transferring their own property.

That exclusion is why special powers dominate long-term family planning. A donor creates a trust for a child, gives that child a special power to appoint among grandchildren, and when the child exercises the power the assets pass to the next generation without estate tax at the child’s level. The structure can repeat across generations.

Special powers also give the donee meaningful flexibility. A parent serving as donee can adjust distribution shares among their children based on who needs the money most at the time. One child may be financially secure while another faces medical debt. The special power lets the donee respond to those realities rather than being locked into a fixed split chosen decades earlier.

General Powers of Appointment

A general power exists when the donee can direct trust property to any of four recipients: themselves, their own estate, their creditors, or the creditors of their estate. The donee only needs the ability to appoint to one of those four for the power to count as general.²

The estate tax consequence is severe. Trust property subject to a general power is pulled into the donee’s gross estate at death, whether or not the donee ever actually uses it. The IRS treats the donee as the functional owner because the donee had the unrestricted right to take the assets. Those assets face the same 40 percent top rate as any other estate property.³

The gift tax side is just as aggressive. Exercising or releasing a general power created after October 21, 1942, is treated as a transfer of property by the donee for gift tax purposes, even though the donee never technically owned the assets. A donee who exercises a general power during life may need to file Form 709 and use part of their lifetime gift tax exemption.⁴

The HEMS Exception

One of the most misunderstood provisions in this area is the ascertainable standard exception. A power that lets the donee use trust property for their own health, education, support, or maintenance (commonly abbreviated as HEMS) is not treated as a general power, even though the donee can technically benefit themselves.²

The logic is that these standards are measurable and enforceable by a court. A donee limited to HEMS distributions cannot drain the trust for luxury purchases or speculative investments. That constraint removes the unlimited discretion that makes a power “general” for tax purposes.

In practice, this exception is enormously useful. A trust can name a beneficiary as their own trustee, give them the power to distribute principal to themselves for health, education, support, or maintenance, and the entire trust stays outside their taxable estate. Without the HEMS exception, any self-benefit power would be general, and the family would need an independent trustee for every distribution decision.

Five-and-Five Powers

Planners rarely give a beneficiary an unlimited general power, but they also don’t want to cut off all access to principal. The “five-and-five” power threads that needle. It lets the donee withdraw each year the greater of $5,000 or 5 percent of the total trust value, without the entire trust being swept into the donee’s estate.²

If the donee dies with an unexercised five-and-five power, only that year’s withdrawable amount is included in the gross estate. The rest of the trust stays outside. And if the donee lets the withdrawal right lapse at the end of a calendar year without using it, that lapse is only treated as a taxable release to the extent the lapsed amount exceeds the greater of $5,000 or 5 percent of trust assets. Within those limits, the lapse triggers no gift tax.⁴

This is one of the most commonly used provisions in trust drafting. It gives the beneficiary real access to cash for living expenses while keeping the bulk of the trust outside their taxable estate.

When a General Power Is Actually Useful

General powers are not always something to avoid. Because a general power forces trust assets into the donee’s gross estate, those assets receive a stepped-up tax basis at the donee’s death. Under IRC Section 1014, property included in a decedent’s gross estate by reason of a power of appointment takes a new basis equal to its fair market value at the date of death.⁵

This matters when a trust holds highly appreciated assets. Picture a trust funded with stock that originally cost $200,000 and is now worth $2,000,000. With only a special power, the assets never enter anyone’s estate and the original low basis carries forward. The next generation eventually sells and owes capital gains tax on $1,800,000 of gain. If the donee instead holds a general power, the stock is included in their estate, basis resets to $2,000,000, and the next generation can sell with no capital gains at all.

Planners sometimes give a donee a general power on purpose when the donee’s own estate sits well below the $15,000,000 exemption. The inclusion triggers no estate tax because exemption is available, and the family picks up a full basis step-up.¹

Creditor Exposure Follows the Same Divide

The split between general and special powers runs through creditor protection too. In most states, if a donee holds a general power, creditors can reach the trust assets to satisfy the donee’s debts. The reasoning mirrors the tax logic: someone who can take the property for themselves is treated as the functional owner. When the donee’s personal assets are insufficient, creditors can step into the donee’s shoes and exercise the general power.

Special powers work the opposite way. Because the donee cannot appoint trust property to themselves, creditors have no claim. The authority to direct property to others does not create an ownership interest. This protection holds whether or not the donee ever exercises the power.

State law varies on the details, particularly for unexercised general powers. Some states following the Uniform Trust Code treat the donee of a general power as a settlor for creditor-access purposes. Others only expose the assets when the donee actually exercises the power. If protection from creditors is a priority, the type of power granted should be central to the drafting conversation.

Disclaiming the Power

A donee who does not want the responsibility or tax consequences of a power can refuse it through a qualified disclaimer. If done correctly, the IRS treats the donee as though they never received the power, avoiding both estate tax inclusion for general powers and any unintended gift tax consequences.⁶

The requirements are strict. The disclaimer must be irrevocable, in writing, and signed by the disclaimant. It must identify the power being refused and be delivered to the trustee or other person responsible for the trust property. The deadline is nine months after the transfer that created the power, or nine months after the disclaimant turns 21, whichever is later. For a power created in a will, the clock usually starts on the date of the testator’s death.⁶

The disclaimant must not have accepted any benefits from the power before disclaiming. If a donee exercises the power even once, or receives distributions that flowed from the power’s existence, the disclaimer fails. The disclaimed power then passes as though the donee predeceased the donor, usually falling to the takers in default named in the trust document. The disclaimant cannot direct where the property goes.

Creating and Exercising the Power

The trust document has to use clear language identifying the donee, specifying whether the power is general or special, and defining the permissible appointees. Vague language invites litigation and can cause a court to classify the power differently than the donor intended, with potentially devastating tax consequences.

Most well-drafted trusts also spell out how the donee has to exercise the power. Common requirements include exercising through a will, a revocable trust, or a separate written instrument delivered to the trustee. Many trusts require the donee to make a “specific reference” to the power in whatever document exercises it. That requirement exists for a reason: without it, generic language in the donee’s will, such as a residuary clause leaving “all my property,” might accidentally exercise the power and redirect trust assets in ways nobody anticipated.

The instrument the donee uses must also comply with the laws of the donee’s home state. For a will, that means proper witnesses and attestation. A mismatch between the trust’s requirements and the donee’s documents is one of the most common failures in this area, so the donee’s estate planning attorney should review the original trust and coordinate the exercise language precisely.

When the donee fails to exercise the power, exercises it without following the required formalities, or dies before acting, the power lapses and the trust property passes to the takers in default. For general powers, a lapse can itself trigger tax consequences under the five-and-five rules above. For special powers, a lapse typically has no tax impact because the donee was never treated as the owner.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 US Code 2041 – Powers of Appointment
3
Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
4
Office of the Law Revision Counsel. 26 US Code 2514 – Powers of Appointment
5
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
6
eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer