Powers of Appointment by y3GCC2

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									Trusts & Estates                                                               Prof. Loebl
Spring Semester                                                                2005

                                  Powers of Appointment

1. Definition

       A power of appointment is the right to select, within prescribed limits, who shall
receive an interest in property or how interests in property shall be allocated. A power of
appointment is not a property right (see Long, pp. 668-671); instead it is a power to
determine who shall have a property right. It is an important estate planning device
especially in regard to trusts with successive interests. It gives flexibility to beneficiaries
and permits the person creating the power to take advantage of the fact that the person
holding the power will have better information as to what the ultimate disposition of the
property subject to the power should be. For example, Isabella Hunnewell Dexter would
have had better information as to who should have received the principal of her father’s
trust when she died in 1968 than her father would have had when he executed his will
more than 64 years earlier.

        The person who conveys the power is the “donor”; the person who is invested
with the power is the “donee.” The persons in whose favor the power may be exercised
are the “objects” of a power. When the power has been exercised, these persons become
“appointees.” Property subject to the power is the “appointive property.” When the
power specifies who takes if the power is not exercised, that person is a “taker in
default.” As with trusts, a single person may play more than one role here. In contrast
with trusts, a power of appointment generally does NOT impose a fiduciary relationship
between the donee and the objects of the power.

        Powers of appointment may be broken down into different types. The two most
important are the “general” power of appointment versus the “special” power of
appointment. A general power of appointment allows the donee to appoint the property
to the donee herself, the donee’s creditors, estate, or estate’s creditors. This same
definition is used for federal tax purposes. A special power is the opposite, i.e., a power
of appointment that is limited to a group of permissible appointees, which DOES NOT
include the donee, donee’s creditors, estate or estate creditors. The second important
classification is between powers that are “presently exercisable,” that is, inter vivos
powers, and powers that are testamentary and may not be exercised by the donee except
by will. Inter vivos powers of appointment are exercisable by deed (basically, they are in
writing).

        Further, an “imperative” power is one that the donee has a duty to exercise (a
relatively rare phenomenon), whereas a discretionary power need not be. In cases where
the donee failed to exercise a testamentary special power of appointment and the donor
did not provide for takers in default, courts have either held that the donee had an
imperative power to appoint the property or that there was an implied gift to the objects
of the power in default of an appointment. See Loring, pp. 702-706. An “exclusive”



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power allows the donee to exercise a special power of appointment in favor of one or
more of a class of permissible appointees, but not necessarily to all of them; thus, the
donee may exclude objects of the power. Under a nonexclusive power, all the objects
must receive something, if the power is exercised. There are further classifications, but
these are the most important.

        When a power of appointment is exercised, the object of the power is supposed to
be treated as having received the property from the donor, not the donee, and the transfer
is generally (but not always) deemed to relate back to the date of the transaction that
created the power. This doctrine has not been consistently applied in the case of general
powers as the donee of a general power of appointment is considered the owner of the
property for federal estate, gift and income tax purposes (you are not being held
responsible for any tax provisions related to general powers of appointment). But under
state property law, the donor of the general power of appointment is the owner of the
property subject to the power.

2. Creation

        No particular words are needed to create a power of appointment. Powers can be
held by a variety of actors in the trusts and estates drama. For instance, the trustee of a
trust may hold a power of appointment. And, when a discretionary trust is involved, one
can conceive of the trustee’s power to distribute income and/or principal in his/her
discretion as a kind of power of appointment. The really interesting and creative uses of
powers of appointment arise when they are given to a beneficiary of a trust.

        As with wills and trusts, the donor must have the intent to create a power of
appointment, but because no special language is required, it is sometimes difficult to
distinguish a genuine power of appointment from other things. The recurring
classificatory problems involve:

a. power of appointment vs. nondiscretionary disposition (see casebook, bottom of p.
676)
b. power of appointment vs. precatory language (“to X with the power to appoint by will
to her issue” vs. “to X in the hope that she will give the property to her issue”).
c. power of appointment vs. fee simple absolute.

        This latter issue is particularly problematic where there is a power to consume
principal and the document conferring it is badly drafted. Compare “income of the trust
to my wife for her lifetime and upon her death, the remainder to my issue, but if my wife
shall need the principal for her support, then she may invade the principal” with “to my
wife absolutely, but if there be any of said property remaining upon her death, then to my
issue.” As you can see, in both cases, the wife could use all the property and wipe out
any interest of the remaindermen. The second conveyance creates difficult interpretive
problems. Where, as in the latter case, the conveyance to the first taker (here, the wife) is
expressly or impliedly an unlimited and unrestricted power of disposal, the conveyance is
treated as a fee simple absolute and the limiting language is ignored. In that case, the



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putative remaindermen have no interest. This is the famous “rule of repugnancy.” The
latter conveyance shown here should never be used in good estate planning drafting. In
general, simple life estates in property are trouble. Instead, the property should be placed
in trust with well-defined provisions.

3. Release of a power

        One cannot validly contract to exercise a testamentary power of appointment in
favor of a particular object. To do so functionally converts the testamentary power into
an inter vivos power. Thus, courts will not specifically enforce such contracts. However,
they will restore in restitution to the one contracting for the value given to obtain the
promise. However, the donee of a testamentary power can often achieve almost the same
effect as contracting, by the indirect method of release.

         When a donee “releases” a power, the donee is agreeing NOT to exercise it, in
whole or in part. If a donee wholly releases a power of appointment, designated takers in
default will get the property, or if there are none, the property will usually pass to the
donor’s estate. Contracts to release powers WILL be enforced. Here is an example:
Assume that Donee has a general testamentary power of appointment. Assume further
that the instrument conveying the power to Donee specified that Donee’s children are
takers if Donee fails to exercise his power (“takers in default”). Because the power is
general, Donee could appoint to anyone by will. Assume that Donee’s children would
like to contract with him to create an enforceable promise that Donee will upon his death
exercise the power in their favor, not for his creditors or someone else. A contract
requiring Donee to affirmatively exercise the power in favor of the children is invalid.
But assume instead that Donor contracts and declares that he will not exercise his power
of appointment. In that case, the children will receive the appointive property as takers in
default. This arrangement is enforceable and gets the property to the children by a
different route. The possibility of release can create difficult interpretive problems (e.g.,
was it an invalid contract to appoint, or a release; was the release total or partial, etc.)

4. Exercise

         It should not be difficult to tell when a donee has actually used (exercised) the
power of appointment. However, there are some recurring problems even here. They
mainly involve the context of wills. First, if one holds a power of appointment, should
we conclude that the power is automatically exercised by the residuary clause in the
donee’s will? Here there are two things to consider. What does the language of the will
say—how expressly did it refer to any powers? Second, what kind of power was
involved. The majority rule is that a standard residuary clause does not automatically
exercise a power of appointment. However, a minority of jurisdictions takes the view
that a standard residuary clause DOES exercise a GENERAL, but not a specific, power of
appointment. Of course, if the clause indicates an intent to exercise powers, then the
powers are exercised, unless the original donor of the power has required the donee to
make what is called a “specific” reference to the power when exercising it. Donors often




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do this to avoid the problems of standard general residuary clauses and unintentional
exercise of a power.

        Powers whose exercise requires a specific reference create another interpretive
problem—how specific does the reference have to be to be effective? Would the
following language exercise a power that required a specific reference?—“I give the rest
and residue of my property to my wife including all property over which I have a power
of testamentary disposition.” This kind of provision is known as a “blending clause.”
Another area of difficulty here is that courts disagree over how much evidence extrinsic
to the donee’s will should be considered to determine the donee’s intent. This is a
particular problem in the case of a blending clause. UPC section 2-704 says that the mere
use of a blending clause does not show an intent to make reference to a power of
appointment, if that power requires a specific reference. Nonetheless, it allows extrinsic
evidence to be used to determine the donee’s actual intent. In contrast, UPC section 2-
608 states that where the power does NOT require a reference, a specific reference, or an
express reference, a general residuary clause in a will or a will generally disposing of all
the donee’s property DOES exercise the power, BUT ONLY IF the power is a general
power that does not designate takers in default of its exercise or the will of the donee
shows an intention to include the power.

        Other problems with exercise involve restrictions on the donee’s power to appoint
in further trust, to create a further power of appointment, or to exercise the power
exclusively. With regard to the first two, the traditional general rule was that the power
to appoint in further trust or to create another power of appointment is permissible with a
general power, but not with specific powers. This is changing with the appearance of
Restatement (Second) of Property, Donative Transfers § 19.4.

        With regard to exclusivity, the general rule is that special powers of appointment
are presumed to be exclusive, unless the donor shows a contrary intent. This means that
the donee can exclude entirely one or more objects of the power.


    5.      Lapse

         If an appointee predeceases the donee of a testamentary power of appointment,
will courts apply the antilapse statutes so that the appointee’s descendants take the
appointive property? In the case of a general power of appointment, most jurisdictions
will distribute the appointive property to the appointee’s descendants if the relationship
test in the antilapse statute is satisfied. This is despite the fact that the antilapse statutes,
by their own terms, actually apply to devisees who receive gifts under wills rather than
appointees who receive property pursuant to an exercise of a power of appointment (see
UPC § 2-605 on p. 441 and the Texas antilapse statute in Footnote 18 on page 442).
Courts have reasoned that a general power of appointment is substantially equivalent to
ownership and that the donee should be treated as if she had disposed of her own
property. Thus, if Sandy appoints in her will the principal of a trust over which Sandy
had a general power to Seth, her cousin, and Seth predeceases her, leaving three children



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who survive Sandy, the principal would be divided into three equal shares and distributed
to Seth’s children under the UPC (under the Texas antilapse statute, Seth’s children
would not take as they are not descendants of either of Sandy’s parents).

         Courts have also applied antilapse statutes in the case of special powers of
appointment. However, courts traditionally would not permit substitute takers under the
antilapse statutes to receive the appointive property unless they were also objects of the
special power. Thus, if Gloria could only appoint by will the principal of a trust to her
brothers and sisters, then her sister Janet’s son, Josh, would not be able to take the share
appointed to Janet, as Josh was not an object of the power. However, as discussed in the
first full paragraph on page 696, the rule is changing and substitute takers under antilapse
statutes (like Josh in the example above) are now being treated as objects of the power in
the Restatement (Second) of Property, Donative Transfers.




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