Trusts: Powers of Appointment

Question 1

General v. Limited POA

Answer 1

General:
- Equivalent of full ownership
- Arguably reachable by creditors
- Part of PH’s taxable estate

Limited:
- Something less than full ownership
- Not reachable by creditors
- Excluded from PH’s taxable estate

Question 2

What is a Power of Appointment

Answer 2

The ability of a party to direct distributions from a trust in a non-fiduciary capacity.

Under traditional law, a Trustee’s ability to make distributions was considered a POA, however modern law differentiates between a POA and a fiduciary distributive power

Question 3

How to Create a POA

Answer 3

Expressly giving a POA

Through a Distributive Provision
- Right to demand or absolute right to receive
- Trustee (who is also B) has non ascertainable
distribution standard

EXAMPLE: Franco established an irrevocable trust
for the benefit of his brother, Charlie. The Trust provides that Charlie receives all of the net income each year, and principal for Charlie’s Health, Education, Maintenance and Support.

Question 4

The “Backdoor” GPOA

Answer 4

HYPO: Margaret establishes an irrevocable trust for the benefit of Samantha. The Trust states that the Trustee can distribute to Samantha as much income and principal as the Trustee deems necessary for Samantha’s general comfort and happiness.

Does this create a general power of appointment? If so, for whom? Answer: it depends on who is the Trustee

If someone other than Samantha is the Trustee, then NO GPOA

If Samantha is the Trustee, then GPOA
- Saving grace – HEMS (ascertainable) standard

Question 5

General POA

Answer 5

A POA exercisable in favor of any one or more of the following:
- The Powerholder,
- PH’s estate,
- PH’s creditor(s),
- the creditors of the PH’s estate

Property that is subject to a GPOA is treated as belonging to the PH, even if the power has never been exercised.

BUT if the GPOA is released or lapses, a creditor of the PH can no longer make a claim against the property subject to the power.

Question 6

Requirements for a Valid Exercise of POA

Answer 6

For a valid exercise:
1) PH must manifest an intent to exercise
- Majority of states – residuary clause not enough
- Can have blanket manifestations of intent

2) PH must satisfy the formal requirements

3) Must be a permissible exercise (within scope)

Question 7

How “far” can the power holder appoint?

Answer 7

• Outright distribution
• Continuing Trust
• Series of generational continuing trusts

Limitation: RAP

Question 8

Specific POA

Answer 8

A POA NOT exercisable in favor of any one of the following:

• The PH (and their estate)
• the PH creditor(s) (and the creditors of the PH’s estate)