Testamentary Power of Appointment: Roles, Tax Rules, and Creditors

A testamentary power of appointment is authority one person gives another to decide, through that other person’s own will, who will receive specified property at death. The person granting the authority (the donor) creates it in a will or trust. The person holding it (the donee) never owns the property but can direct where it goes when they die. This pushes the final distribution decision forward in time, so the donee can account for circumstances the donor could not have predicted, and the tax and creditor consequences turn almost entirely on how broad that authority is.

The Four Roles

Four terms carry most of the weight in this area. The donor creates the power and originally controls the property. The donee, sometimes called the powerholder, receives authority to direct where the property goes. The appointees are the people or organizations the donee can select. The appointive property is the specific asset or pool of assets the power covers.

The donee does not own the appointive property. They hold decision-making authority, nothing more. That distinction drives everything that follows.

General Powers vs. Special Powers

The single most important distinction is between general and special powers.

A general power of appointment lets the donee direct the property to anyone, including themselves, their own estate, their creditors, or the creditors of their estate.¹ Because the donee could effectively appoint the property to themselves, the IRS treats a general power almost like ownership.

A special (or limited) power restricts the donee to appointing property only among a designated group, and the donee cannot be one of the potential recipients. Federal regulations define a power as “not general” when it is exercisable only in favor of designated persons or classes other than the donee, the donee’s creditors, the donee’s estate, or the creditors of the donee’s estate.² A donor might, for example, give a surviving spouse the power to distribute trust assets among their children and grandchildren but nobody else.

The HEMS Exception

A power that looks general on its face is not treated as general if it is limited by an ascertainable standard related to health, education, support, or maintenance. Estate planners call this the HEMS standard. If a trust lets the donee use principal only for their own health, education, maintenance, or support, the IRS does not treat that as a general power of appointment even though the donee can technically direct property to themselves.¹ It’s one of the most heavily used tools in trust drafting.

How the Power Is Created

A common misconception is that a testamentary power must be created inside a will. The word “testamentary” describes when the power can be exercised, not where it originates. A testamentary power is one the donee can only exercise through their own will at death. The donor, though, can create that power in either a will or an inter vivos trust.

Whichever instrument is used, the donor must clearly identify the donee, describe the appointive property, and indicate the permissible appointees (or leave the class open for a general power). Federal regulations look to the substance and effect of the arrangement rather than any particular wording.²

How the Donee Exercises the Power

Because the power is testamentary, the donee exercises it through their own will. They cannot use it during their lifetime. The will directs who receives the appointive property, and that direction takes effect at the donee’s death.

How explicit the donee’s will must be depends on the terms set by the donor and on state law. Three approaches are common:

Specific-exercise clause. The donee’s will expressly identifies the power by name and directs the appointive property to specific recipients. This is the safest method and the one estate lawyers almost universally recommend.
Blanket-exercise clause. The donee’s will includes broad language exercising “any power of appointment” the donee holds, without naming the specific power. Many states recognize this as effective.
Residuary clause. The donee’s will simply disposes of “all my property” without mentioning powers of appointment. Under the Uniform Powers of Appointment Act, adopted in a growing number of states, a bare residuary clause exercises a general power only when there is no gift-in-default provision in the donor’s instrument, the donee has not released the power, and the instrument containing the residuary clause does not show a contrary intent.

If the donor’s instrument requires a specific reference for the power to be exercised, a general residuary clause will not work. Getting this wrong means the property passes as if the donee never acted.

What Happens If the Power Is Not Exercised

If the donee dies without exercising the power, the appointive property does not become part of the donee’s personal estate. The donee never owned it.

Most well-drafted instruments include a gift-in-default clause naming backup recipients. If the donor’s trust says “to my grandchildren in equal shares if the power is not exercised,” the property flows to the grandchildren automatically. When no default provision exists, the appointive property generally reverts to the donor’s estate and passes under the donor’s residuary clause or, failing that, through intestacy laws.

Federal Tax Consequences

Tax treatment is where the general-versus-special distinction really matters.

Estate Tax Inclusion for General Powers

Property subject to a general power of appointment is included in the donee’s gross estate for federal estate tax purposes, whether or not the donee actually exercises the power.¹ The IRS treats the donee as the functional owner because they could have directed it to themselves. Even letting the power lapse can trigger inclusion if the lapse exceeds certain thresholds.

For 2026, the federal estate tax exemption is $15,000,000 per individual.³ Estates above that amount face a top marginal rate of 40%. If a donee already has a sizable estate, adding appointive property through a general power can push the total above the exemption and generate a significant tax bill that would not exist with a special power.

Estate Tax and Special Powers

Property subject to a special power of appointment is generally not included in the donee’s gross estate. Because the donee cannot appoint the property to themselves or their creditors, the IRS does not treat them as a functional owner. That makes special powers popular when the donor wants to give the donee flexibility without inflating the donee’s taxable estate.

The Delaware Tax Trap

An exception catches people off guard. If a donee exercises a special power of appointment by creating a new power that could postpone the vesting of property interests beyond the original perpetuities period, the appointive property gets pulled into the donee’s gross estate under IRC 2041(a)(3).¹ This is the Delaware tax trap. Planners sometimes trigger it deliberately to obtain a basis step-up on appreciated assets in an older trust. Triggering it accidentally creates an unexpected estate tax bill.

Gift Tax on Lifetime Exercise or Release

Exercising or releasing a general power of appointment during the donee’s lifetime is treated as a transfer by the donee for federal gift tax purposes.⁴ Exercising a special power normally does not trigger gift tax, except when the donee uses that special power to create another power of appointment as described above.

Basis Step-Up

Property included in a decedent’s gross estate through a power of appointment qualifies for a stepped-up basis under IRC 1014(b)(9). The recipients receive the property at its fair market value as of the donee’s date of death rather than at the original purchase price.⁵ For highly appreciated assets in an older trust, this step-up can save recipients far more in capital gains tax than the estate tax costs. If the property is not included in the donee’s gross estate because it is subject only to a special power, no step-up occurs and the original basis carries over.

Disclaiming the Power

A donee who does not want the responsibility or tax exposure of holding a power of appointment can disclaim it. A qualified disclaimer under federal tax law must be irrevocable, in writing, signed by the donee or their legal representative, and delivered within nine months of the transfer that created the power.⁶ The donee must not have accepted any benefit from the power before disclaiming.

For a general power, the nine-month clock starts when the transfer creating the power occurs. For a special power, the deadline runs from the original transfer that created or authorized the creation of the power.⁶ Missing this window means the donee is stuck holding the power, with the tax consequences that follow.

Creditor Access to Appointive Property

Whether creditors can reach appointive property depends on the type of power. When a donee holds a general power, many states allow the donee’s creditors to reach the appointive property on the theory that the donee could have appointed it to themselves. The broader the donee’s authority, the harder it is to shield the property from claims.

Property subject to a special power of appointment is generally beyond the reach of the donee’s creditors. Because the donee cannot appoint the property to themselves or their creditors, there is no basis for treating it as an available asset. State laws vary, so the donor’s choice of governing law matters.

1
Office of the Law Revision Counsel. 26 USC 2041 – Powers of Appointment
2
eCFR. 26 CFR 20.2041-1 – Powers of Appointment; in General
3
Internal Revenue Service. What’s New – Estate and Gift Tax
4
eCFR. 26 CFR 25.2514-1 – Transfers Under Power of Appointment
5
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
6
eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer