Source: http://fredfranke.com/articles/19-1powers-appointment-general/
Timestamp: 2017-12-14 17:11:40
Document Index: 226697602

Matched Legal Cases: ['§ 2041', '§ 2514', '§ 15', '§ 15', '§ 15', '§229', '§ 4', '§ 4', '§ 4', '§ 4', '§ 2', '§ 2041', '§ 2514', '§ 15', '§ 15', '§ 15', '§229', '§ 4', '§ 4', '§ 4', '§ 2']

Powers of Appointment | Estate & Trust Lawyer | Annapolis, MD
A power of appointment permits a trust beneficiary to designate further disposition of a property. When a beneficiary (or a string of beneficiaries) is given the power to determine the disposition of property, a trust becomes dynamic and sensitive to changing circumstances. In Maryland, property which is the subject of a power of appointment remains that of the donor of the power. Connor v. O’Hara, 188 Md. 527, 532, 53 A2d 33 (1947) (“Property passing under a power of appointment is regarded as received from the donor of the power, not from the donee.”). Donors may create either a general power of appointment or a special power of appointment. A general power of appointment is: “power which is exercisable in favor of the [donee], his estate, his creditors, or the creditors of his estate.” I.R.C. § 2041b(1); see also I.R.C. § 2514c. A special power of appointment is a power that is not exercisable in favor of the donee, his estate, his creditors, or the creditors of his estate. This distinction is critical for federal tax purposes because a general power of appointment brings the property into the donee’s estate. This distinction is important when dealing with marital deduction trusts. Although the QTIP trust[1] is the most prevalent form of marital deduction trust, property can also be left in trust for a surviving spouse and qualify for the marital deduction by giving the surviving spouse a general power of appointment. Under federal tax laws a general power of appointment is also an important planning tool for non-exempt GST[2] (or dynasty) trusts. Granting a general power of appointment in such circumstances sidesteps the generation-skipping transfer tax rates. In Bryan v. United States, 286 Md. 176, 177, 406 A.2d 423 (1979), the Maryland Court of Appeals addressed the following question certified from the district court: do terms in a will providing a donee with a “general power of testamentary disposition” with respect to certain property accord the donee the power to appoint the property to herself or to her estate? In Bryan, the decedent (a lawyer) established a trust for the benefit of his surviving spouse. That trust (a pre-QTIP) provided his spouse with the authority to appoint the corpus of the trust in her will: “[A]t her death [the trustee] shall dispose of the corpus thereof (including any accrued income) as [the surviving spouse] may direct by her will pursuant to a general power of testamentary disposition with respect to the [marital trust] which is hereby granted to her.” Id. at 177-178. The court held that this language did not create a general power of appointment in the wife:
“Since 1888, we have consistently adhered to the view that the donee of a testamentary power otherwise general may not direct property subject to the power to his own use, absent a specific enabling grant of this authority…While conceding that our case law requires specific language to create a power enabling a donee to appoint to his estate or creditors, appellants argue that the use of the words “general power” alone satisfies this requirement. We disagree.”
Id. at 179. In reaching this conclusion, the Court of Appeals rejected appellants’ contention that the will must be examined in its entirety to determine whether the testator has sufficiently expressed his intention to give his surviving spouse the power to appoint to her estate or creditors. Similarly, the court expressly declined to look beyond the testator’s explicit statements to discern his intention. In Bryan, the court distinguished a case with a seemingly different result: Guiney v. United States, 425 F.2d 145 (4th Cir.1970). In Guiney, the court found a general power of appointment when the testator granted a “general power of appointment…in order that one-half of my estate may qualify for the marital deduction… as provided by the Internal Revenue Code of 1954…” Id. at 147. The Fourth Circuit held that this explicit reference to the Internal Revenue Code incorporated the Code’s general powers of appointment provisions. Based on this incorporation by reference, the court construed the will to give the surviving spouse the power to appoint the principal of the trust to herself or her estate under statute. The Maryland Court of Appeals stated that the facts of Bryan were distinguishable from those in Guiney and declined to express an opinion “on the validity of [the Guiney Court’s] interpretation of Maryland Law.” Bryan, 286 Md. at 182. `A general power of appointment also has consequences for the creditors of the donee of the power. In Brent v. Cent. Collection Unit, 311 Md. 626 (1988), the Court of Appeals held that the creditors of a trust beneficiary could reach the assets of the trust after the beneficiary gained the power to appoint such assets to herself. The trust at issue had spendthrift provisions which governed the trust. Additionally, the trust instructed that when the beneficiary reached 40 years of age she could direct that the trustees pay her all of the trust assets. By the time the trust beneficiary reached the age of 40, she was legally incompetent and an in-patient at a state mental hospital. The state sought to reach the trust assets to pay for her care. The Court of Appeals held that the trust had a general power of appointment and that the donee and the donee’s creditors could reach those assets. The court ruled that if property is subject to alienation by the owner it also becomes subject to his debts. “The key is the right of the beneficiary to the corpus as distinguished from his actual possession of it. So the rights of the beneficiary’s creditors depend upon the beneficiary’s interest in the property, not on the actual distribution of the funds to him.” Id. at 634. “The fact that there might be a ‘condition subsequent’ to receiving that is wholly in the hands of the beneficiary (like the requirement that there be written notice by the beneficiary) is ignored. ‘If the beneficiary has the absolute right to receive the corpus, the fact that he did not choose to exercise the power is ‘wholly immaterial’.” Id. at 635. The fact the beneficiary was incompetent to actually exercise her power to withdraw trust assets was immaterial: “It was her right to demand distribution of the corpus that governed, not her ability to demand.” Id. at 641 (emphasis in original). The court referenced Estates and Trusts Article § 15-102(w) (now § 15-102(x)), which grants a guardian the ability to exercise any inter vivos powers which the minor or disabled person could have exercised under any instrument. See Md. Code Ann., Est & Trusts § 15-102(x). Powers of appointment may also be exclusive or nonexclusive. An appointment to a class is exclusive if the donee may arbitrarily appoint anyone in the designated class to the exclusion of the others. The appointment is nonexclusive if no right of exclusion of any of the class is given to the donee. 22 M.L.E. Wills §229 (2011). Maryland law addresses the extent to which a residuary clause in the will exercises a power of appointment:
“Subject to the terms of the instrument creating the power, a residuary clause in a will exercises a power of appointment held by the testator only if: 1. An intent to exercise the power is expressly indicated in the will; or 2. The instrument creating the power of appointment fails to provide for disposition of the subject matter of the power upon its non-exercise.”
Md. Code Ann., Est. & Trusts § 4-407. This provision is intended to provide guidance in situations involving a residuary clause and no specific mention of a specific power of appointment. In Lederer v. Safe Deposit & Trust Co., 182 Md. 422, 35 A.2d 166 (1943), the court held that a will’s residuary clause (stating that the will was to govern property over which a testator had a power of appointment) effectively exercised the power of appointment even though the will execution predated the creation of the power of appointment (which occurred when the will was republished by codicil after execution of the deed of trust). Generally, in order to satisfy the express indication required by § 4-407, a specific statement of the intent to exercise the power is required but the source of a specific power of appointment need not be stated. Carruthers v. Buscher, 38 Md. App. 661, 382 A.2d 608 (1978). The purpose of the alternative condition enumerated by § 4-407(2) is to strike a balance between a fair rule, and exercise of power:
“The purpose of the second clause of § 4-407 is to accomplish the exercise of testamentary powers of appointment in a way that is generally fair when the power is not expressly exercised in the will and when the result of non-exercise of the power would otherwise be a reversion to the creator of the power. At the same time, the purpose was to avoid the inadvertent exercise of the power when the testator may have intentionally declined to exercise it so that the subject matter of the power would pass in accordance with the terms of the instrument that created it.”
Mahan v. Mahan, 320 Md. 262, 577 A.2d 70 (1990). The Uniform Probate Code approaches this topic a little differently. Under § 2-608 of the Uniform Probate Code, a general residuary clause in a will is seen as exercising a power of appointment only if: (i) the power of appointment is a general power and the creating instrument does not contain a gift if the power is not exercised; or (ii) the testator’s will manifests an intention to include the property subject to the power. Thus, the Uniform Probate Code requires a will to manifest an intention to include all property subject to the power in order for a special power of appointment to pass under a residuary clause. The comment to this section explains that a residuary clause which directs “all of my property” or the like is presumed to express an intention to exercise a power of appointment only when one of the Code’s conditions are satisfied. For example, a will manifesting an intent to include property subject to the power would be a blending or blanket-exercise clause such as “all the rest, residue, and remainder of my estate, including any property over which I have a power of appointment…” The comment makes clear that a general residuary clause without reference to any power of appointment would fail to manifest an intention to include the property subject to the power. As discussed above, Maryland law is similar to the Uniform Probate Code. However, in Maryland the donor’s failure to include a gift over clause cause the general residuary clause to operate regardless of whether the power of appointment was special or general.
[1] A QTIP trust is established to qualify for a marital deduction. Black’s Law Dictionary (8th ed. 2004). Assets under a QTIP trust are referred to as qualified-terminable-interest property. Id.
[2] A GST supertrust is a generation-skipping trust funded with the amount that is permanently exempt from generation-skipping tax and designed to last more than two generations. Black’s Law Dictionary (8th ed. 2004).
A power of appointment permits a trust beneficiary to designate further disposition of a property. When a beneficiary (or a string of beneficiaries) is given the power to determine the disposition of property, a trust becomes dynamic and sensitive to changing circumstances. In Maryland, property which is the subject of a power of appointment remains that of the donor of the power. Connor v. O’Hara, 188 Md. 527, 532, 53 A2d 33 (1947) (“Property passing under a power of appointment is regarded as received from the donor of the power, not from the donee.”).
Donors may create either a general power of appointment or a special power of appointment. A general power of appointment is: “power which is exercisable in favor of the [donee], his estate, his creditors, or the creditors of his estate.” I.R.C. § 2041b(1); see also I.R.C. § 2514c. A special power of appointment is a power that is not exercisable in favor of the donee, his estate, his creditors, or the creditors of his estate. This distinction is critical for federal tax purposes because a general power of appointment brings the property into the donee’s estate. This distinction is important when dealing with marital deduction trusts. Although the QTIP trust[1] is the most prevalent form of marital deduction trust, property can also be left in trust for a surviving spouse and qualify for the marital deduction by giving the surviving spouse a general power of appointment. Under federal tax laws a general power of appointment is also an important planning tool for non-exempt GST[2] (or dynasty) trusts. Granting a general power of appointment in such circumstances sidesteps the generation-skipping transfer tax rates.
In Bryan v. United States, 286 Md. 176, 177, 406 A.2d 423 (1979), the Maryland Court of Appeals addressed the following question certified from the district court: do terms in a will providing a donee with a “general power of testamentary disposition” with respect to certain property accord the donee the power to appoint the property to herself or to her estate? In Bryan, the decedent (a lawyer) established a trust for the benefit of his surviving spouse. That trust (a pre-QTIP) provided his spouse with the authority to appoint the corpus of the trust in her will: “[A]t her death [the trustee] shall dispose of the corpus thereof (including any accrued income) as [the surviving spouse] may direct by her will pursuant to a general power of testamentary disposition with respect to the [marital trust] which is hereby granted to her.” Id. at 177-178. The court held that this language did not create a general power of appointment in the wife:
Id. at 179. In reaching this conclusion, the Court of Appeals rejected appellants’ contention that the will must be examined in its entirety to determine whether the testator has sufficiently expressed his intention to give his surviving spouse the power to appoint to her estate or creditors. Similarly, the court expressly declined to look beyond the testator’s explicit statements to discern his intention.
In Bryan, the court distinguished a case with a seemingly different result: Guiney v. United States, 425 F.2d 145 (4th Cir.1970). In Guiney, the court found a general power of appointment when the testator granted a “general power of appointment…in order that one-half of my estate may qualify for the marital deduction… as provided by the Internal Revenue Code of 1954…” Id. at 147. The Fourth Circuit held that this explicit reference to the Internal Revenue Code incorporated the Code’s general powers of appointment provisions. Based on this incorporation by reference, the court construed the will to give the surviving spouse the power to appoint the principal of the trust to herself or her estate under statute. The Maryland Court of Appeals stated that the facts of Bryan were distinguishable from those in Guiney and declined to express an opinion “on the validity of [the Guiney Court’s] interpretation of Maryland Law.” Bryan, 286 Md. at 182.
`A general power of appointment also has consequences for the creditors of the donee of the power. In Brent v. Cent. Collection Unit, 311 Md. 626 (1988), the Court of Appeals held that the creditors of a trust beneficiary could reach the assets of the trust after the beneficiary gained the power to appoint such assets to herself. The trust at issue had spendthrift provisions which governed the trust. Additionally, the trust instructed that when the beneficiary reached 40 years of age she could direct that the trustees pay her all of the trust assets. By the time the trust beneficiary reached the age of 40, she was legally incompetent and an in-patient at a state mental hospital. The state sought to reach the trust assets to pay for her care. The Court of Appeals held that the trust had a general power of appointment and that the donee and the donee’s creditors could reach those assets. The court ruled that if property is subject to alienation by the owner it also becomes subject to his debts. “The key is the right of the beneficiary to the corpus as distinguished from his actual possession of it. So the rights of the beneficiary’s creditors depend upon the beneficiary’s interest in the property, not on the actual distribution of the funds to him.” Id. at 634. “The fact that there might be a ‘condition subsequent’ to receiving that is wholly in the hands of the beneficiary (like the requirement that there be written notice by the beneficiary) is ignored. ‘If the beneficiary has the absolute right to receive the corpus, the fact that he did not choose to exercise the power is ‘wholly immaterial’.” Id. at 635. The fact the beneficiary was incompetent to actually exercise her power to withdraw trust assets was immaterial: “It was her right to demand distribution of the corpus that governed, not her ability to demand.” Id. at 641 (emphasis in original). The court referenced Estates and Trusts Article § 15-102(w) (now § 15-102(x)), which grants a guardian the ability to exercise any inter vivos powers which the minor or disabled person could have exercised under any instrument. See Md. Code Ann., Est & Trusts § 15-102(x).
Powers of appointment may also be exclusive or nonexclusive. An appointment to a class is exclusive if the donee may arbitrarily appoint anyone in the designated class to the exclusion of the others. The appointment is nonexclusive if no right of exclusion of any of the class is given to the donee. 22 M.L.E. Wills §229 (2011).
Maryland law addresses the extent to which a residuary clause in the will exercises a power of appointment:
“Subject to the terms of the instrument creating the power, a residuary clause in a will exercises a power of appointment held by the testator only if:
1. An intent to exercise the power is expressly indicated in the will; or
2. The instrument creating the power of appointment fails to provide for disposition of the subject matter of the power upon its non-exercise.”
Md. Code Ann., Est. & Trusts § 4-407. This provision is intended to provide guidance in situations involving a residuary clause and no specific mention of a specific power of appointment. In Lederer v. Safe Deposit & Trust Co., 182 Md. 422, 35 A.2d 166 (1943), the court held that a will’s residuary clause (stating that the will was to govern property over which a testator had a power of appointment) effectively exercised the power of appointment even though the will execution predated the creation of the power of appointment (which occurred when the will was republished by codicil after execution of the deed of trust). Generally, in order to satisfy the express indication required by § 4-407, a specific statement of the intent to exercise the power is required but the source of a specific power of appointment need not be stated. Carruthers v. Buscher, 38 Md. App. 661, 382 A.2d 608 (1978).
The purpose of the alternative condition enumerated by § 4-407(2) is to strike a balance between a fair rule, and exercise of power:
Mahan v. Mahan, 320 Md. 262, 577 A.2d 70 (1990).
The Uniform Probate Code approaches this topic a little differently. Under § 2-608 of the Uniform Probate Code, a general residuary clause in a will is seen as exercising a power of appointment only if: (i) the power of appointment is a general power and the creating instrument does not contain a gift if the power is not exercised; or (ii) the testator’s will manifests an intention to include the property subject to the power. Thus, the Uniform Probate Code requires a will to manifest an intention to include all property subject to the power in order for a special power of appointment to pass under a residuary clause. The comment to this section explains that a residuary clause which directs “all of my property” or the like is presumed to express an intention to exercise a power of appointment only when one of the Code’s conditions are satisfied. For example, a will manifesting an intent to include property subject to the power would be a blending or blanket-exercise clause such as “all the rest, residue, and remainder of my estate, including any property over which I have a power of appointment…” The comment makes clear that a general residuary clause without reference to any power of appointment would fail to manifest an intention to include the property subject to the power. As discussed above, Maryland law is similar to the Uniform Probate Code. However, in Maryland the donor’s failure to include a gift over clause cause the general residuary clause to operate regardless of whether the power of appointment was special or general.