Powers of Appointment: building in flexibility

How do you provide for situations you cannot know?

PoA Terms
Donor Donee A B C D (Objects) Appointees
Special: Not self, creditors, estate, estates creditors Agent of Donor General: others, self, creditors, estate, estates creditors Close to, but not actual ownership

OR Takers by default

General Powers presently exercisable and creditors

Irwin Union Bank & Trust Co v Long (Ind, 1974)
Laura Long, Settlor Victoria ==Philip Long UBTC

...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 on the date of such notice, which right shall not be cumulative.

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 Not Longs property for ordinary creditors or forced shares; but Longs property for estate and gift tax, bankruptcy, and rule against perpetuities.

Tax law is different: you dont fool IRS

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

2. If exercised during donees 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 trust established 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)

The relevant question here: 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 vague residuary clause to exercise the power, but Mass. no longer would: TREND IS STRONGLY TOWARD REQUIRING EXPLICIT EXERCISE (TX)

1. Income to wife for life 2. Then basically income per stirpes; trustee discretion with principal 3. At the death of each such taker, such takers principal should go as specified in takers will 4. Takers by default: intestate heirs

Lapse and Powers of Appointment

Suppose appointee dies before donee? What do these words mean?
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/donees 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

Powers and Creation of Trusts

General power: theoretically, donee would have to appoint to self FIRST before creating a trust. Now courts generally overlook that technicality.

* 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

Special Powers: Exclusive or Non-Exclusive

Exclusive = may exclude some of the objects Nonexclusive = must give some to each object *Presumption generally in favor of exclusive special powers *Problems of language Among the children of A Among such of the children of A Which of these two is clearly an exclusive power?

Casners formula for special power

On 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 daughters 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 settlors 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 settlors 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 this power 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

Foster== Elsa Cousin Paul

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 Foster 3. Foster, obviously, is not her kindred

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 a common disposition Blended property is allocated to increase effectiveness of disposition.

Capture
For general powers only, for ineffective or incomplete exercises of a power *May prevent return to donors estate. *When a donee of a general power *Manifests an intent to assume control of the appointive property for 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.