a23_prappts

8/3/2019 A23_PrAppts

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Powers of Appointment: building in

flexibility

How do you provide for situations you cannotknow?



PoA Terms

Donor

Donee

A B C D (Objects)

Appointees OR Takers by default

Special: Notself, creditors,

estate, estate’s

creditors

Agent of Donor

General: others, self,creditors, estate,

estate’s creditors

Close to,

but not

actual

ownership



General Powers presently exercisable

and creditors

Irwin Union Bank & Trust Co v Long (Ind, 1974)

Laura Long, Settlor UBTC

Victoria ==Philip Long

...shall have the right to

withdraw from principal once

in any calendar year upon 30

days written notice to the

trustee up to 4% of the market

value of the entire principal onthe date of such notice, which

right shall not be cumulative.

Not Long’s property for ordinary creditors or forced shares;

but Long’s property for estate and gift tax, bankruptcy, and rule

against perpetuities.

Is this a power of appointment,general or special?

Yes, a general power of appointment

Can a divorce decree get to that 4% if Philip

does not make application?NO. Not his until he appoints. (Except Wisc; Mich; CA)

Often can levy as soon as he exercises and before paid



Tax law is different: you

don’t fool IRS

1. FOR IRS, donee of a GENERAL power of appointment is

owner

2. If exercised during donee’s life, subject to gift tax

3. If not exercised, taxable under estate tax



BUT, you

can do this

*To A in trust for A for life*with A to receive income

*with SPECIAL power of appointment by deed or will

*with power to consume trust property for HEMS (or for

maintenance of standard of living to which accustomed)

*with power to withdraw $5,000 or 5% of corpus, whichever is

greater, each year

ALMOST OWNERSHIP, BUT, FOR TAXES, NOT OWNERSHIP OF

CORPUS OR AMOUNTS NOT TAKEN IN PRIOR YEARS



Exercise of a

Power of Appointment

Will a residuary clause exercise

a power of appointment?

Be absolutely clear about the exercise of a power of

appointment

“all the residue of my property real and personal and property

over which I have a power of appointment under the X trustestablished by Y, which power I here exercise …

All states allow residuary clause to

exercise power of appointment in this form



Beals v State Street Bank

& Trust Co (Mass. 1975)1. Income to wife for life

2. Then basically income per

stirpes; trustee discretion

with principal3. At the death of each such

taker, such taker’s principal

should go as specified in

taker’s will4. Takers by default: intestate

heirs

The relevant questionhere: the will provision

in step 3 (to right) was

not specific, but only:

all “the rest, residue and

remainder of my property” (BUT

THEN STIPULATED PROPERTY

SUBJECT TO A DIFFERENT PoA)

THIS case allowed that vagueresiduary clause to exercise the

power, but Mass. no longer

would: TREND IS STRONGLY

TOWARD REQUIRING EXPLICIT

EXERCISE (TX)



Lapse and Powers

of Appointment

Does the antilapse statute apply (stipulating

that appointee is within requisite blood line of donee)?

Powers do not come strictly under antilapse statutes

*For general powers: they are close enough that courts will USUALLY

extend antilapse protection (but this conceptualization would limit)*Or will fudge using the testator/donee’s intent. (This

conceptualization focuses on INTENT and thus would not necessarily

end at antilapse statute bloodline)

*For special powers: if the special power is limited to the necessary

bloodline ambit, courts often give to heir of predeceased appointee

Suppose appointee dies before

donee? What do these words mean?



Powers and Creation of

Trusts

* Special power: increasingly but not always, donees of special

powers may appoint in trust , but not to frustrate limitations of power of appointment.

*Appointing to create a new power of appointment (before,

controversial): donee of a special power may appoint an interest with

a new general power (taxation purpose), but not to violate limitations

General power: theoretically,donee would have to appoint to

self FIRST before creating a trust.

Now courts generally overlook that

technicality.



Special Powers:

Exclusive or Non-Exclusive

*Problems of language

“Among the children of A”

“Among such of the children of A”

Which of these two is clearly an exclusive power?

Exclusive = may exclude someof the objects

Nonexclusive = must give

some to each object

*Presumption generally infavor of exclusive special

powers



Casner’s formula for special powerOn the death of such daughter, the trustees shall pay the then-remaining principal

and undistributed income to, or hold the same for the benefit of , such one or more

of such daughter’s issue living at her death or born thereafter and such charitable

organizations as such daughter shall appoint by a will, executed after the death of the survivor of the settlor and the settlor’s said wife, which refers specifically to this

power. The exercise of this power by such daughter, however, shall not apply to the

proceeds of any life insurance on the life of such daughter payable to the trust.

Subject to the above restrictions in the exercise of this power of appointment, the

settlor’s said daughter may appoint outright or in trust; she may select the trustee or

trustees if she appoints in trust; she may create new powers of appointment in a

trustee or trustees or in any other appointee; she may, if she appoints in trust,

establish such administrative powers for the trustee or trustees as she deems

appropriate; she may create life interests or other limited interests in some of the

appointees with future interests in favor of other appointees; she may impose lawful

conditions on an appointment; she may appoint to one or more of the objects of thispower to the exclusion of other objects and she may appoint by will in any manner;

provided always, however, that no appointment shall benefit, either directly or

indirectly, one who is not an object of this power, and that nothing herein shall be

construed as authorizing such daughter to appoint to herself, her creditors, her

estate, or creditors of her estate. (Broaden to spouses and issue of donor)



Fraud on a

Special Power

1. Elsa had special testamentary power of appointment; objects were “her kindred”

2. She agreed with Paul that she would

devise him $250,000 if he would grant

$100,000 to Foster3. Foster, obviously, is not “her kindred”

Foster== Elsa

Cousin Paul

This is fraud on a special power, because, although it purports to

abide by the limitations on the power, it arranges to divert the assets

to one who is not an object.

Trial court found that the $150,000 arranged for Paul could stand,

because he was a legitimate object

*Appellate court found that neither Foster nor Paul got anything



Ineffective Exercise

of a Power

Allocation:

(will not cure express misallocation)

If a donee in one instrument

Blends both appointive and own property in acommon disposition

Blended property is allocated to increase effectiveness

of disposition.



Capture

For general powers only, for ineffectiveor incomplete exercises of a power

*May prevent return to donor’s estate.

*When a donee of a general power

*Manifests an intent to assume control of the appointive propertyfor all purposes and not merely for the limited purpose of giving

effect to the expressed appointment

*THEN the trust property is captured for the estate of the donee.

I give all my property and any property over which I have a power of

appointment as follows: $10,000 to my friend B (predeceases);

$15,000 to my dog Trixie (Rule against Perpetuities); all the rest to C.

Donee has captured; B and Trixie get nothing; C takes all.

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