Power of appointment

Last updated May 07, 2022

A power of appointment is a term most frequently used in the law of wills to describe the ability of the testator (the person writing the will) to select a person who will be given the authority to dispose of certain property under the will. Although any person can exercise this power at any time during their life, its use is rare outside of a will. The power is divided into two broad categories: general powers of appointment and special powers of appointment. The holder of a power of appointment differs from the trustee of a trust in that the former has no obligation to manage the property for the generation of income, but need only distribute it.

General power of appointment

Example: "I leave my video game collection to be distributed as my son Andrew sees fit."

In the United States of America, a general power of appointment is defined for federal estate tax purposes in the Internal Revenue Code §2041.^[1] A general power of appointment is one that allows the holder of the power to appoint to himself, his estate, his creditors, or the creditors of his or her estate the right to have the beneficial use and enjoyment of certain property covered by the power of appointment. The holder of a general power of appointment is treated for estate tax purposes as if he or she is the owner of the property subject to the power, regardless of whether or not the power is exercised. Thus, the property that is subject to the power is includable in the power holder's estate for estate tax purposes.

A general power of appointment is a key element of a type of marital deduction tax law as prescribed in Internal Revenue Code §2056(b)(5). It is a trust that qualifies for the marital deduction, provided that the surviving spouse is given the income at least annually and the surviving spouse has a general power of appointment over the trust property remaining at his death.

Most general powers of appointment are exercisable under a will. The holder of the power refers to the document creating the power in his or her will and designates who among the permissible objects of the power should receive the property. The power could be exercised by creating further trusts.

If the power of appointment is not exercised, the default provision of the document that created the power takes over.

Special power of appointment

Example: "I leave my cactus collection to my children, my wife Pat to choose who receives which cactus."

A special power of appointment allows the recipient to distribute the designated property among a specified group or class of people, not including donee, donee's estate, creditors of donee, or creditors of donee's estate.^[2] For example, a testator might grant his brother the special power to distribute property among the testator's three children. The brother would then have the authority to choose which of the testator's children gets which property. Unlike a general power of appointment, the refusal of the appointed party to exercise a specific power of appointment causes the designated property to revert as a gift to the members of a group or a class.

A special power of appointment may be exclusive or nonexclusive. If exclusive, the donee can appoint all the property to one or more members of the class of permissible appointees to the exclusion of the other members of the class. If nonexclusive, the donee must appoint some property to each object.^[3]

Special powers of appointment also appear in the context of a trust and are primarily used to reduce liability for generation-skipping transfer tax, or to provide asset protection trust features without fraudulent conveyance liability. In the United States, such trusts are referred to as SPA Trusts .

Testamentary power and power presently exercisable

In addition to general and special powers, donors may limit when the power may be exercised by the donees. Testamentary powers are usually indicated by the inclusion of limiting language in the granting instrument such as "to B for life, remainder to persons as B shall 'by will' appoint". General powers presently exercisable do not contain such limitations on power. Wording such as "to B for life, and upon B's death to those that B shall appoint" indicates a power presently exercisable, not a testamentary power.

In some jurisdictions, the donee's creditors cannot reach the appointive property when the donee has a presently exercisable power of appointment as long as the power is unexercised.^[4]

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Will and testament Legal declaration by which a person distributes their property at death

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Wills have a lengthy history.

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In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator. The settlor may also be the trustee of the trust or a third party may be the trustee. In the common law of England and Wales, it has been held, controversially, that where a trustee declares an intention to transfer trust property to a trust of which he is one of several trustees, that is a valid settlement notwithstanding the property is not vested in the other trustees.

A testamentary trust is a trust which arises upon the death of the testator, and which is specified in his or her will. A will may contain more than one testamentary trust, and may address all or any portion of the estate.

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A discretionary trust, in the trust law of England, Australia, Canada and other common law jurisdictions, is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia or New Zealand. Where the discretionary trust is a testamentary trust, it is common for the settlor to leave a letter of wishes for the trustees to guide them as to the settlor's wishes in the exercise of their discretion. Letters of wishes are not legally binding documents.

United States trust law Law regulating a wealth-holding legal instrument

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In English law, secret trusts are a class of trust defined as an arrangement between a testator and a trustee, made to come into force after death, that aims to benefit a person without having been written in a formal will. The property is given to the trustee in the will, and he would then be expected to pass it on to the real beneficiary. For these to be valid, the person seeking to enforce the trust must prove that the testator intended to form a trust, that this intention was communicated to the trustee, and that the trustee accepted his office. There are two types of secret trust — fully secret and half-secret. A fully secret trust is one with no mention in the will whatsoever. In the case of a half-secret trust, the face of the will names the trustee as trustee, but does not give the trust's terms, including the beneficiary. The most important difference lies in communication of the trust: the terms of a half-secret trust must be communicated to the trustee before the execution of the will, whereas in the case of a fully secret trust the terms may be communicated after the execution of the will, as long as this is before the testator's death.

The South African law of succession prescribes the rules which determine the devolution of a person's estate after his death, and all matters incidental thereto. It identifies the beneficiaries who are entitled to succeed to the deceased's estate, and the extent of the benefits they are to receive, and determines the different rights and duties that persons may have in a deceased's estate. It forms part of private law.

In United States trust law, a SPA Trust is an irrevocable trust that includes a special power of appointment. Unlike general powers of appointment, a special power of appointment is limited to a certain class of persons or entities that may receive the benefit of the power (appointee) from the person in whom the power is vested (donee). Generally, SPA trusts are used to hold property for asset protection purposes, because of the benefits and control a SPA trust offers over the assets protected within the trust.

In United States trust law, an Ultra Trust is a registered trademark whose intellectual property is owned by Estate Street Partners LLC that describes a specific type of intentionally defective grantor-type irrevocable trust that includes an independent trustee as well as a special limited power of appointment. Unlike general powers of appointment, a special limited power of appointment within the Ultra Trust is limited to a specific person(s) who retains the benefit of the power (grantor) from the person in whom the power is vested (trustee). Generally, Ultra Trust's are used to reposition all types of assets for purposes of asset protection, as an Ultra Trust offers the ability to have an independent third party own assets previously owned by the grantor.

Administration in United Kingdom law is the main kind of procedure in UK insolvency law when a company is unable to pay its debts. The management of the company is usually replaced by an insolvency practitioner whose statutory duty is to rescue the company, save the business, or get the best result possible. It is the equivalent of Chapter 11, Title 11, United States Code, although with significant differences. While creditors with a security interest over all a company's assets could control the procedure previously through receivership, the Enterprise Act 2002 made administration the main procedure.

Blackwell v Blackwell [1929] UKHL 1 is an English trusts law case, concerning the doctrine of secret trusts.

References

↑ "Internal Revenue Code §2041" (PDF). Government Printing Office.
↑ See, e.g., New York Estates Powers and Trusts Law § 10-3.2.
↑ Dukeminier, J. et al. Wills, Trusts, and Estates, Eighth Edition. Aspen Publishers, New York: 2009, p. 822
↑ See e.g., Irwin Union Bank & Trust Co. v. Long, 312 N.E.2d 908 (Indiana 1974)

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[1] "Internal Revenue Code §2041" (PDF). Government Printing Office.

[2] See, e.g., New York Estates Powers and Trusts Law § 10-3.2.

[3] Dukeminier, J. et al. Wills, Trusts, and Estates, Eighth Edition. Aspen Publishers, New York: 2009, p. 822

[4] See e.g., Irwin Union Bank & Trust Co. v. Long, 312 N.E.2d 908 (Indiana 1974)

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