Powers of Appointment Flashcards
Basic POA concepts:
Power of appointment is not a property interest. It is a personal power to the donee. Not a fiduciary power so no obligation to exercise the power. No one can force the donee to exercise the power, even the court.
What is the most important thing to recognize for POA?
Whether the power is testamentary, inter vivos, general, non-general → must look at the donor document because it depends on donor intent!!
When can the power be exercised?
Have to look at the donor document:
Either inter vivos, testementary, or both.
If donee can exercise in their will → testamentary
If document says “during the life time or at death” → both
Who are the permissible appointees? Two subcategories:
Non-general power: donee cannot exercise the power for the donee’s own economic benefit (ANY economic benefit)
General power: Donee can exercise the power for the donee’s own economic benefit.
Permissible appointees
Class of permissible appointees can be very broad (up to anyone in the world except the donee) or could be limited to donor’s children, etc.
If non-general and limited to a class → next question: is the class exclusive or not:
If exclusive: could appoint to child 1, 2, or 3
PRESUME exclusive unless specified otherwise.
If non exclusive: if the donee decides to exercise the power, has to benefit all of the class!
Non-general power tax consequences
(whether broad or limited class of permissible appointees)
NO adverse tax consequences to the donee for possessing the power.
NO adverse tax consequences to the donee for exercising the power.
The property over which the donee has the power is not attachable by donees creditors.
We prefer non-general powers!!
General power tax consequences
If NOT limited by HEMS:
an intervivos power grants the donee constructive ownership, so for tax purposes → income tax to the donee.
If donee exercises the power in favor of someone else → possible gift tax consequences (if taxable gift and exemption met).
If donee dies without exercising the power → included in his gross estate.
If limited by HEMS:
Not included in donee’s gross estate
No adverse gift tax consequences
If limited by HEMS, can’t appoint to his estate because then he’d be dead and it wouldn’t be fore HEMS.
Moral: don’t’ use general power unless limited by HEMS! Probably malpractice to not limit by HEMS.
To what extent can the creditors go after the property subject to the POA?
Creditors have a judgment against the donee who has an intervivos general power NOT limited by HEMS:
Common law: if donee does not exercise the power, creditors cannot attach. If donee exercises and appoints to himself, the creditors can attach. If exercises in favor of anyone else, then question of if the transfer is in fraud of donee’s creditors.
Modern law: Different state approaches.
If in trust and not limited by HEMS, creditors can probably attach to life estate, but very little TX case law.
If intervivos general power limited by HEMS:
If it is in a spendthrift trust: 112.035 controls.
Restatement says that if the beneficiary of the trust is the trustee and can appoint to himself, blows the spendthrift no matter if HEMS or not. Some states follow this.
TX avoids the Rest: 112.035: if limited by HEMS, beneficiary of the trust who is also the trustee can appoint to himself and creditors cannot attach.
In both testamentary and inter vivos powers:
Want to require specific reference to this particular power as a condition precedent to the exercise of the power!
A testator may not exercise a power of appointment through a residuary clause in the testator’s will or through a will providing for general disposition of all of the testator’s property unless:
(1) the testator makes a specific reference to the power in the will; or
(2) there is some other indication in writing that the testator intended to include the property subject to the power in the will.
Best practice: Donee’s will should serve two purposes:
Exercise the power in X’s will executed on X date probated in X county expressly in favor of the children.
Separate disposition of the probate estate.
Some will forms include a “Blending Clause”
I devise my residuary state, including any property in which I have a power of appointment, to my children. This falls under exception 2 of 255.351. So this passes to kids UNLESS the donor’s document requires SPECIFIC reference to the particular power.
Issue to spot with blending clause: If there is a testamentary general power and a blending clause disposition → triggers the doctrine of capture: Captures the appointed property for the donees probate estate!
As of 2023 in Texas: if testamentary general power and blending clause BUT not exercised → NOT included in the donee’s probate estate.
Only times we would use general power:
Crummey trust.
When limited by HEMS.
A revocable intervivos trust → the power of revocation is technically a general power of appointment.
Release of a power of appointment:
Common law said that the donee cannot get rid of the power because it is personal to the donee. DOn’t have to exercise it, but can’t get rid of it.
Modern law (including TX): allows the donee to release the power.
Disclaiming the power:
Common law said no disclaiming because it is not a property interest.
Modern law says that you can disclaim it as if it is property.
No adverse tax consequences to disclimaing, but in some circumstances could be adverse tax consequences for releasing!
