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Chapter 9: Building Flexibility into Trusts: Powers of Appointment

Chapter 9: Building Flexibility into Trusts: Powers of Appointment. What is a Power of Appointment?.

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Chapter 9: Building Flexibility into Trusts: Powers of Appointment

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  1. Chapter 9: Building Flexibility into Trusts: Powers of Appointment

  2. What is a Power of Appointment?

  3. A power of appointment is the authority one person (“the donor”) gives to another (“the donee”) that permits the donee to determine, at a future point in time, what persons will be entitled to enjoy the property over which the donee has the power.

  4. The Language of Powers--

  5. Donor The person who grants another a power of appointment

  6. Donee The person to whom a power of appointment has been granted by a donor

  7. Objects The person(s) to who the donee may appoint the property if the donee exercises the power

  8. Appointees The person(s) to whom the donee appoints the property upon exercise of the power

  9. Takers in Default of Appointment The person(s) who would take the property if the donee fails to effectively exercise the power

  10. Classification of All Powers

  11. Testamentary Intervivos To Self or Estate Interest in property Testamentary Intervivos Not to Self Not to Estate Exclusive Nonexclusive Agency theory GeneralSpecial

  12. Non-exclusive Special Power “Among all (express or implied) my children”

  13. Exclusive Special Power “Any one or more or all of my children”

  14. Irvin Union Bank and Trust v. Long • What are the facts of this case? • What is the issue presented to the court? • Whether creditors of the donee of a presently exercisable general power can reach the assets subject to the power? • Do you agree with the result? • Problem, pg. 677

  15. Why Create a General Power? • Marital deduction • Annual exclusion for gifts to minors • GST $1million exemption

  16. Sterner v. Nelson • To Mary absolutely with power to dispose of property as she desires, any property remaining at her death to Gladys • Options: • Mary has a FSA • Mary has a fee simple with gift over to Gladys and her children • Valid • Repugnant • Mary has a life estate with a power to consume • What does court hold? • Do you agree?

  17. Sterner v. Nelson • How might instrument have been drafted?

  18. Seidel v. Warner • What are the facts of this case? • Contract to exercise general power in the future in a certain way is not specifically enforceable, but for breach, restitution is possible. Why? • Could promise be construed as release and would that have accomplished the promised goal?

  19. Beals v. State Street Bank and Trust • What are the facts of this case? • Cut down general • Effect of general residuary clause • Under NY law • Exercises general and special powers • Under Mass. Law • Exercises general • Exercises special if so intended • Choice of law • Law of donor’s domicile • Law of trustee’s domicile • Law of donee’s domicile

  20. Beals v. State Street Bank and Trust • Law of donor’s domicile controls. • Why • Agree or disagree? • What result here? • Court treats power as general and therefore exercised even under Massachusetts law

  21. Donor Imposed Restrictions on Exercise of Powers • Specific Reference Clause • Why imposed? • Effect if imposed • Blanket Exercise Clause • All the rest, residue and remainder of my estate including any property over which I may have a power of appointment • Exercises all powers unless donor imposed a specific reference requirement

  22. Lapse of Power • T appoints property to A. A dies before T. • General Power • Special Power

  23. Manner of Exercise • Outright to Objects • In trust for objects • To any one or more of my parents issue and spouses of such issue as X may appoint, outright or in further trust, and in such shares manner and proportions and upon such terms and conditions as X may determine

  24. Capture • Applicable to general powers

  25. MARSHALLING OF ASSETS • Applicable to special powers. • D has special power to appoint $100,000 to children • D has a probate estate of $100,000 • D, using a blanket exercise clause, appoints 1/2 to wife and 1/2 to son • General distribution rule-pro rata • Marshalling (non-pro rata)

  26. Loring v. Marshall • What are the facts of this case? • Power in Cabot to appoint to wife and issue • Appoints to wife Anna for life, no appointment of remainder • At wife’s death, who is entitled to trust principal? • Estate of deceased object of power, implied gift theory • Equally to estates of Cabot, Jr. and Anna • Estate of Anna only • Heirs of donor of power

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