On demand 1h 1m 37s Basic

Mighty Powers of Appointment: How They Can Create Dynastic Legacies

4.9 out of 5 Excellent(30 reviews)
Start your free 7-day trial
* Claim credit(s) for one free course during your 7-day trial.
View all credits3 approved jurisdictions
Play video

Mighty Powers of Appointment: How They Can Create Dynastic Legacies

One reason clients request estate planning services is to create legacies, to provide generational wealth, regardless of their particular family dynamics. When first considering this objective, estate planning attorneys look to the alphabet soup – GRATs, INGs, IDGTs, CRTs, and more. However, one often over-looked planning mechanism may work just as well – properly drafted powers of appointment. So, this program covers applicable laws, rules, and regulations for preparing steadfast powers. We will also review hypotheticals to provide hands-on examples of legacy creation despite interesting family dynamics.

Transcript

Max Elliott - Hello, thank you for viewing this presentation on powers of appointment and how this estate planning mechanism, can help create legacies for our clients. I hope you find the materials and information shared helpful in your overall understanding of estate planning and useful for servicing your clients. My name is Max Elliott and I am the founder and managing attorney of the Law Offices of Max Elliott, a boutique estate planning and a state administration firm with offices in Chicago and New York City. 
So yes, powers of appointment are remarkable to me, because instead of using the alphabet soup of trusts, GRATs, NINGs, CRATs, GRITs, CRUTs, and more, we can use deftly of course powers of appointment, which have been around longer and thus are well established in law and supported by centuries of case law and at least a century of tax law. But just because a concept or mechanism, has a longstanding history, doesn't mean it's easy to explain, understand or use. Still that's my goal here today to help practitioners understand powers of appointment and when and how to use them. 
So, today we'll cover definitions, concepts, the common law from which powers are derived and the Model Law, the Uniform Powers of Appointment Act. Also, I will refer to it as UPAA and the Internal Revenue Code, which I will refer to as the Code, both of which the UPAA and the Code codify the common law, and then will also consider practical examples provided, throughout and go through a couple of hypotheticals. To begin the review of the three primary sources of powers of appointment, we'll start with the Uniform Powers of Appointment Act, which I just mentioned that was enacted in 2013. 12 states have adopted the UPAA or some form of it, while other states have powers of appointment incorporated in their statutory code. And then the remaining states rely on common law. Now, Section 102 of the Uniform Power of Appointment Act, it's a definitional section.
Going out of order, let's start with the definition of power of appointment itself. So, we see here, the UPAA defines a power of appointment as the authority to transfer or dispose of property by another party in a non-fiduciary role. Now, because the authority rests in a non-fiduciary capacity, a power holder unlike a trustee, has no mandate to exercise the power. They are not required actually to exercise it. Accordingly, since the trustee function is a fiduciary role, trustees that hold powers of appointment, when exercising the power, unless the power holder is also the donee, the power holders should be deemed not to have any interest in the appointive property. Now, because powers of appointment, are usually created in last wills and testaments, and trusts, testators and set lowers or grantors, are generally the persons who create powers of appointment and are often referred to as donors. So for example, in a revocable living trust, where the set law has reserved a power of appointment for themselves, they are not only the set law, but they're also the power holder. And if they exercise the power for their benefit, they're also the donee. 
But let's kind of go back a little bit and see the example here, A bequeaths Black Acre to B for life and to B's descendants as B exercises the appointment by referring to A's will. So, per the UPAA and as found in prior common law, a property or property interest that is subject to a power of appointment is called appointive property. So, in this example, Black Acre is appointive property. Considering example two, where the trustee is also the power holder with authority over Black Acre's B simple interests or B's descendants. I just kind of talked about that, right? Furthermore, as example three demonstrates, a power holder does not have to be a person, but can be an entity. 
Powers of appointment come in a number of flavors. But arguably the most impactful power is the general power of appointment, because it is this type of power that determines whether the transfer of the appointive property is subject to taxes. It is this type of power, the general power of appointment, we often want to avoid creating or exercising. And how do we do that? By keeping the appointive property from being irrevocably placed or permanently placed. And that is by using it in a way or exercising it, where there is an exception applied or by not exercising it, by not releasing it or not allowing it to lapse. A general power of appointment is defined as a power of appointment exercised in favor of any person or entity, including the power holder, the power holders estate, the power holders creditor, or a creditor of the power holders estate. So, because this is almost de facto, total control and ownership of the interest, appointive property, subject to a general power of appointment is included in the donors gross state for estate tax purposes. But like I said, as with most rules of law, the taxing aspects of a general power of appointment, are not without exception. 
And we'll get to those a little later, but let's think about a non-general power of appointment. And so according to the UPAA a power of appointment that is not a general power of appointment is a non-general power of appointment. Come again. Yeah, I agree. That's a cringe-worthy definition, right? Thus, to better understand, what a non-general power of appointment is. We just need to review the definition of a general power of appointment, as defined by the Uniform Power of Appointment Act and the Code. And the Code has the definition in two sections, Section 2041 for state tax purposes and Section 2514 for gift tax purposes. Now, Section 2514 is worth considering first, because it also addresses the exceptions that I mentioned earlier, right? The UPAA definition of a general power of appointment though, is in fact, like I said, taken from the Code. So again, it's an exercise of a power of appointment for the benefit of the power holder, the power holders estate, the power holders creditors or the creditors of the power holders estate. If a general power of appointment is exercised, without exception in favor of any of the aforementioned, the appointive property reverts to the estate, where it is exposed to taxation. The exercise of a power of appointment is not necessarily defined by the Code, by the UPAA or common law. It's kind of like an understood concept. 
So, consider example seven, where A creates a trust that gives Honeywell Ranch to their spouse, B for life, and then to whomever B chooses. B appoints the property to their children. But because it was a general power of appointment that was exercised, the children's inheritance of Honeywell Ranch, will be subject to an estate tax. And when drafting powers of appointment clauses, practitioners usually place the provisions in the residual sections of a will or a trust. In, so doing practitioners sometimes draft generic or blanket exercise clauses, such as those illustrated in examples eight and nine. And when trying to determine whether a power holder, had the requisite intent to exercise a power of appointment, courts often look to the residuary clause. And if the power is framed inside a blanket clause, courts generally deem the exercise ineffective, whereby often the tax is not triggered. Conversely, a specific exercise clause, will be deemed effective, unless one of the three exceptions provided in Section 2514 of the Code applies. These exceptions are one, that the power is limited to an ascertainable standard, also referred to as a HEMS standard. Two, the power is a joint power, or three, the power is subject to a five and five power. 
So, to summarize the material on fundamental definitions and concepts, a power of appointment is a non-fiduciary authority to dispose of property or a property interest with another party in the future. The creator of the power of appointment is the donor, the person or entity to whom the donor provides the authority is the power holder. The property interest or property subject to the power is called appointive property. And the recipient of the appointive property is often referred to as the donee. 
Now, among the various flavors we talked about, the two primary types of powers of appointment to first understand are general powers of appointment and non-general powers of appointment. If a general power of appointment is exercised without exception, then the value of the appointive property is allocated to the estate for gross estate tax purposes. If however though, a non-general power of appointment is exercised, generally the exercise, doesn't expose the appointive power, property, sorry to tax treatment. And that's what we want, therefore, by using non-general powers of appointment, because of the temporal and non-tax treatment, legacies can be created for our estate planning clients.
 Now, in this next section on applicable laws, to understand how to draft effective powers of appointment, the issues that can arise, by not being sufficiently mindful to the Code sections and lessons from seminal cases, we're going to dive deeper into the UPAA, the Code and common law. Earlier, I touched on the genesis of the Uniform Power of Appointment Act, and we reviewed critical definitions in Section 102. Now, I'd like to review other important sections and provisions. And again, the UPAA is a Model Law that has been adopted, by less than one quarter of the states. So, be sure to review your state's laws on powers of appointment, before crystallizing the powers plan and provisions for your clients. 
Now, speaking of jurisdictions, when questions rise about the intent or exercise of powers of appointment, occasionally the frame is jurisdictional. That is whether the domicile of the donor or the power holder applies. The traditional view is that the domicile of the donor controls all issues and the modern view as articulated, by the UPAA's Section 103 bifurcates the analysis though. So, if the question is about the creation of the power of appointment, the law of the domicile of the donor applies. If the question is about the exercise, release or lapse, the law of the domicile of the power holder governs. And we're going to look at cases, involving jurisdictional issues a little later on. 
Now, Article Two of the UPAA states, how a power can be created and the issues of transfer, revocation and amendment. Now, a valid power of appointment is created if one, the instrument in which the power is created is valid in the jurisdiction, where the instrument was created. So, if there's a power of appointment in a will in New York and the will was valid in New York, then the power of appointment is deemed valid in New York, as long as these next two also apply The power disposes of appointive of property, and the instrument manifests an intent to create the power. Now, powers of appointment cannot be transferred and can only be amended or revoked if the power holder is also the donor. And powers are also subject to local rules. And what we mean by local rules in this context is for example the rule against perpetuities. 
Now, some states have codified and opt-out of the rule against perpetuities. Illinois has, I know. Other states have not. Now, if you recall, the traditional rule against perpetuity clause, requires that 21 years after the death of the last beneficiary, that the trust be terminated and all remaining assets be distributed outright to the remaining heirs. While the rule of per against perpetuities, avoids the gift tax provision of Section 2514 that hauls the appointive property back, into the donors estate for gift tax purposes. If dynasty creating powers of appointment are used, most estate planning attorneys, whose clients want to create legacies, purposefully draft around the rule against perpetuities. And so in doing that, a carefully drafted savings clause is needed to address the rule against perpetuities. And I will talk about that a little bit later, I think in our hypo. 
Now, similar to the requirements for creating a power of appointment are the requirements for exercising powers of appointment. So, the exercise must be valid under local and state law. Two, demonstrate the power holder's intent, three, satisfy the donors stipulations for the exercise and four, be exercised in favor of a permissible appointee. And so an example of an impermissible appointee is an appointee who is dead. The UPAA provides a definition of permissible appointee and it's in the materials. Earlier we reviewed the definitions of blanket exercise and specific exercise clauses, specifically as they pertain to the intent to exercise. Sections 302 and 303 of the Uniform Power of Appointment Act, provide the formula for establishing the intent to exercise in the residuary clause and the explanation of the alternative, sometimes used instead of an exercise, which is the gift-in-default clause. 
Now, examples 12 and 13 illustrate gift-in-default clauses, but like why would a power holder allow a lapse of an exercise or lapse of a power of appointment? If a lapse is equivalent to an exercise, which is actually taxable under Sections 2041 and 2514? Well, if the exercise of a general power of appointment, would minimize I'm sorry, the after tax value of the estate, but a marital deduction trust for example, required a general power of appointment, then the gift-in-default clause, would maximize the after tax value of the trust or estate. I know it gets a little confusing, but there are hypos and further examples. Now, substantial compliance with a donor's requirement, as discussed in Section 304 is a relatively low bar to meet for the power holder requiring the power holder to, one, be cognizant of the requirement, intend to exercise the power and in exercising the power, not frustrate the materiality of the requirement. 
So, what does this look like? Let's think about this, and this is not on the slides or in the material. So, you just kinda have to listen. I, Mickey Mouse hereby give all the income of my Disney shares to Minnie for life, and Minnie shall have the power to appoint to herself, her estate or anyone of her choosing, specifically referring to this power, all income and principal, but only after the shares appreciate by 5%. And if Minnie fails to exercise said power, then the income and shares shall go to our friend, Donald. As the power holder, should Minnie exercise that power of appointment if the shares increase by 10%? Well what's does the donor require? 5%, so yes, right? What if the shares decrease by 5%? Going back to the donor's requirement, the shares must appreciate by 5%. So no, in fact, it might be beneficial for Minnie to exercise the power in favor of her estate at that point if she wants to get a lower evaluation on the estate for tax purposes, right? Now, what if the shares increase by 4% and Mickey, the donors requirement, was to be able to distribute income and principal, only after the shares appreciate by 5%? But they've only appreciated by 4%, should all income and principal be distributed? Probably because again, we're talking about substantial compliance and the spirit of this particular power of appointment, right? What if there's a scuttlebutt about Disney, being bought by Elon Musk? I can't answer that. That's the topic for another discussion. 
Now, one fallacy about estate planning is that we are soothsayers. Estate planning attorneys can predict the future, but we all know that isn't true. So, sticking with Mickey and Minnie for a moment, what if Donald predeceases Minnie and Minnie does not exercise the power, because the shares have been in a free fall basically, since Mickey's death and then Minnie dies. So, Donald the, recipient, the donee, has predeceased Minnie the power holder, Minnie holding this power of appointment. And then the shares have been in free fall. So, she couldn't really exercise it, right? They couldn't exercise it. And then the power holder dies. What happens? The power then lapses. Now, what? Well, if there is an anti-lapse statute in Disneyland, perhaps the power will go to Minnie's descendants. If there isn't, then the power is considered to have lapsed completely and will revert to Mickey's gross estate for estate tax purposes. Again, this might be beneficial if those shares are in a free fall and the estate is confronting a tax. But what if the converse flight of the shares were true? Like they just like exploded to great and high levels, after Mickey died, but the same facts then held true. Without an anti-lapse statute, this could be disastrous for descendants. Now, the Uniform Power of Appointment Act's, Articles Four and Five govern release contract and creditor rights, almost all of which are subject to and mandated, by the instrument creating the power. So, the will or trust. Furthermore transfers of appointive property, are also subject to fraudulent conveyance laws. 
Now, turning from the Uniform Power of Appointment Act to the Internal Revenue Code, practitioners should know that Sections 2041 and 2514, are not the only sections of the Code that implicate powers of appointment. These mechanisms are used to create future gifts that experience minimal or no tax treatment, which is the opposite of the Code's purpose, right? That purpose to define and determine the scope of the government's taxing power. So, let's consider tax provisions that could affect a non-general power of appointment, such as a power exercised within three years of the power holder's death or an interest that was retained by the power holder, before their death and a reversionary interest that is included in the decedent's gross estate, regardless of the essence of non-general powers of appointment. If any of these three provisions from the Code, are applicable to the appointive property, then the non-general power, non-taxing aspect is nullified. Now, when reviewing Section 2041, we see that when the powers are created is also important. Many of you have likely had to review old and cold trusts, trusts that were created by our clients grandparents, or even great grandparents. For powers created before October 21st, 1942, the Code actually takes a favorable position, toward taxpayers and power holders releasing or lapsing general powers of appointment. But after October 21st, 1942, a release is included in the donor's gross estate, as is a non-exercise or lapse for the assessment of estate taxes. 
Now, another area near and dear to estate planning attorney's hearts that also implicates powers of appointment is Section 2056, right? That's the section that governs estate tax treatment for surviving spouses, specifically the marital deduction. Now, using a combination of the marital deduction and a limited power of appointment on the QTIP portion, tax exposure for estates involving blended families, may be minimized. Section 2511 illustrates why powers of appointment, are important to understand with respect to the annual gift tax regime, articulated in Section 2501. But recall unless a general powerful appointment is exercised without exception, even if subject to the annual gift tax, appointive property will generally be taxed. So, there is a potential for double taxation. Now, Section 2514 as mentioned earlier, defines powers of appointment in the context of general gift tax transfers. Therefore it also provides exceptions to the rules of taxing general powers. 
The exceptions that are most commonly applied, are the five and five power exception to lapsed power and the HEMS standard that is defined in 2514 . The five and five power provides beneficiaries the ability to withdraw part of the trust corpus, without triggering inclusion for state tax purposes, per 2514. If the withdrawal is no more than $5,000 or 5% of the aggregate value of the assets out of which or the proceeds of which, the exercise of the lapse powers could be satisfied. So, you gotta understand why we tend to prefer the HEMS standard, also known as the ascertainable standard that allows for the exercise of a general power of a appointment if the appoint of property is used for the health, education, maintenance or support in reasonable comfort of the recipient. Practitioners should be careful when drafting a provision that invokes the ascertainable standard in that any language deviating from the language provided by the Code, such as general welfare, instead of maintenance, or happiness, instead of support and reasonable comfort could result in a gift tax inclusion. 
Now, another mechanism available to power holders, certain power holders is a qualified disclaimer. A qualified disclaimer requires that the beneficiary acknowledges the gift, within 90 days of receiving information about same and also specify in writing to the trustee that the beneficiary has received no benefit whatsoever or used the appointive property and has no intent to do so and deliver that writing to the trustee, within that 90 day period. And again, caution is advised, because the power must be limited, by an ascertainable standard as previously described. So, what type of situation, would lend itself to the use of a qualified disclaimer? Well, because it could create problems for a trustee power holder, depending on the terms of the trust. A qualified disclaimer could potentially be used for a power holder, who is not a trustee and whose power is limited to exercise for health education, maintenance, or support in reasonable comfort. 
Consider this example, A gives Black Acre to B for life and a power of appointment to B for B's descendants that can only be exercised for the benefit of the descendants health, education, maintenance or support in reasonable comfort. B does not want Black Acre. So, B disclaims the life estate and the power leaving B's descendants as the power holders. If we consider further implications, those powers are not joint powers, yielding additional after-tax maximization. Consider this example, A gives Black Acre to B for life and a power of appointment to B for B's descendants that can only be exercised for the benefit of the descendants health education, maintenance, or support and reasonable comfort. Now, B does not want Black Acre. So, B disclaims the life estate and the power, leaving B's descendants actually as the power holders. If we consider further implications, those powers are also joint powers, thereby yielding additional after-tax estate maximization. 
Another common mechanism planners use to create legacies, are GST trusts. That is generation skipping transfer trusts. A skip person is someone who is 37 and a half years or more younger than the donor. So, it's usually a grandchild. To create GST trusts, practitioners must draft carefully to avoid taxes assessed on skip persons. This primarily involves ensuring the powers of appointment, are non-general powers. Now, one may think that simply changing the formula, so that all powers in GST trusts are non-general, would be the solution. However, understanding the intent of a colleague's work, who prepared the original trust or the deceased spouse's intent is sometimes difficult. See example 15. Let's say A's attorney understood that A wanted to create a legacy for their descendants and A's spouse B agreed with this decision, then A died and B amended their trust and not understanding what was necessary, just told their new attorney to exercise the power in favor of their children, via the trust, which actually doubles the problem. Not only does the testamentary power of appointment with the estate as a donee, brings the appointive property back into the estate for estate tax purposes, but by exercising the appointment by trust, instead of a testamentary deed, such as in joint tenancy with rights of survivorship, the gift tax provision is now also applicable, as if the Uniform Power of Appointment Act, independent statutory laws, and the Code were not enough to blur the area around these mighty powers, we now have common law to talk about. But in certain cases, common law can actually provide much needed clarity. Consider United States v. Field, where the surviving spouse exercised the testamentary power of appointment in favor of her children. The treasury assessed an estate tax on the value of the appointive property, but the court ruled that while the power was in fact a general power, their surviving spouse, Kate, was only the power holder, not the donor. This was not her estate. Therefore the tax was erroneous. Now, because of the mobile nature of society, we should also consider the interplay of powers of appointment across jurisdictions. 
So, for example, let's look at the first case in this context, Morgan v. Commissioner. In Morgan, the issue was what was the scope and applicability of the decedent's domicile in the exercise of a general power of appointment? Elizabeth Morgan's father, created testamentary powers of appointment in two trusts, by will and deed. The powers were also subject to strong conditions, whereby the trustees had great discretion to withhold exercising the powers, were those conditions not satisfied. However, Elizabeth presumably satisfied the conditions and the trustees conveyed the appointed property per Elizabeth's will to her spouse. Now, like her father at the time of her death, Elizabeth was domiciled in Wisconsin. Upon review the internal revenue commissioner, determined that the properties value, should have been included in Elizabeth's state. Now, Elizabeth's executor though disagreed, explaining that the power of appointment Elizabeth had to appoint anyone was defined by Wisconsin law, as a special power of appointment. But the United States Supreme Court disagreed, reasoning that and I quote, "State law creates legal interests and rights. "The federal revenue acts designate, "what interests or rights so created shall be taxed," end quote. Thus the court held that the IRS's conclusion that Elizabeth had a general power of appointment for state tax purposes was correct. Now, the executor proffered a second argument, based on the broad discretion of the trustees and the court rebuffed that argument too, explaining that the trustees control, was governed by the trust terms and thus irrelevant. The dispositive factor here, was the character of the exercise. That is the exercise was derived, from a general power of appointment. 
Now, another case involving powers of appointment and domicile is the 1958 case Hanson v. Denckla, involving the challenge to a trust, created by Dora Browning Donner and specifically $400,000 of the trusts principal. In 1935, Ms. Donner established a trust in Delaware, using a Delaware trust company as the trustee. The trust provided Ms. Donner with a power to appoint gifts to persons or trusts, either during her lifetime or upon her death. Now in 1939, Ms. Donner executed the power of appointment, created in the 1935 trust and then created another power of appointment to replace the one that she just exercised. In 1944, Florida became her domicile. And five years later, Ms. Donner prepared a will, and again, exercised her power of appointment, this time in favor of two trusts that her daughter had established in 1948 and also established them in Delaware. Now, Ms. Donner's grandsons, Donner Hanson and Joseph Donner Windsor, were the beneficiaries of the two trusts that Ms Donner's daughter had established and the appointive property was valued at $400,000. 
Now, Ms. Donner died in 1952, and her will designated her daughter, who created those two trusts Elizabeth Donner Hanson, as the estate executrix and provided Elizabeth with a power of appointment. Ms. Donner had also bequeathed $500,000 from the residue of the estate to each of her other two daughters, Katherine Denckla and Dorothy Stewart. Thus Ms. Donner intended her grandsons to receive $400,000. And her two sisters, Katherine and Dorothy, to receive $1 million. The grandsons aunts brought a suit, trying to void the power of appointment that was exercised in favor of their two nephews. The result of which would bring of course, that $400,000 back into the residuary estate of which Katherine and Dorothy were legatees. In bringing an action in the Chancery Court of Florida, the sisters only served notice though on their other sister, the executrix, their nephews and another potential beneficiary. the Delaware trustees were not. And really couldn't be personally served. So, the executrix filed a motion to dismiss this action on the basis of lack of jurisdiction, over the indispensable parties, the Delaware trustees, right? You want this $400,000, but this $400,000 is sitting in a trust that is established under Delaware law and with Delaware trustees. So, you actually need to bring those Delaware trustees into court, but they couldn't, because of the jurisdictional issue, right? So, the Florida Chancery Court granted the motion to dismiss in part only on the non-resident parties, but the Florida court, also ruled the power of appointment void and that the $400,000 was to revert to the residue under the will. 
Now, before the court made this ruling in Florida, the executrix filed an action in Delaware to determine who could take under the trust in Delaware. Now, this time notice was served on all relevant parties and nearly everyone appeared at trial. The Delaware court ruled the appointment valid and thus the exercise valid. The executrix, then brought this Delaware ruling, before the Florida Supreme Court that had affirmed its lower court's ruling and still did, reasoning that Delaware should have given, full faith and credit to the wills construction in Florida. This of course created a split on the issue, between Florida and Delaware. Now, the executrix contended that the full faith and credit clause, should supersede Florida's court's reasoning, whereby Florida should recognize the trust construction provided by the Delaware court. The Florida court had founded its decision on the jurisdictional choice of law rules in Pennoyer v. Neff which was like I said, an in rem jurisdiction analysis. However, the Supreme Court ruled that Florida's court's analysis was erroneous, explaining that the Florida court had no jurisdiction, over Delaware trustees and based their analysis on the more flexible standard of in-personam jurisdiction, provided in International Shoe, as opposed to the old and unyielding analysis of in rem jurisdiction of Pennoyer v. Neff, thus the court further also stated that the Delaware court was not required to extend full faith and credit to Florida, finding in favor of the executrix. Now, really kind of interesting is reading the dissent, an additional fact relevant to the case emerged, the Florida court had deemed the appointment testamentary, because of the appointment clause in the will. However, the appointment to the grandsons, was an inter vivos appointment. So, it's interesting that neither of the US Supreme Court, nor the descent actually flushed this issue out.
 And a final more recent case on the issue of jurisdiction and power of appointment is the 1981 case, White v. the United States, which was decided by the Southern District of Indiana. In White, Theodore Townsend died in 1973, leaving a wife and three children. At his death, Theodore was in Indiana domiciliary. Theodore's estate, consisted of assets from his mother's testamentary trust, which was established in New York, where she was domiciled and then assets from the trusts of Ruth M. Kinney and Albert J. Townsend. Now, Theodore's mother's trust, gave him a general power of appointment to be exercised by will with gifts-in-default to his issue. Theodore's will provided specific bequests to educational institutions and then divided his residuary estate equally, among his three children. The gift-in-default was his sister, followed by another educational institution. Theodore's will was silent about a trust or a power of appointment. Now, the executor of Theodore's estate, was his longtime accountant, George S. Olive, Jr. George filed the appropriate tax return and then paid the taxes from the estate on the value of the inheritance from Ruth and Albert's trusts. He then filed the Form 706 for the assets from Theodore's mother's estate, noting on the form that the assets were not to be included in Theodore's gross estate. The IRS disagreed, siting New York law and assessed a tax of $99,727.39. The court considered Indiana law, which provided that a device in a will is not an exercise of a power of appointment, unless the will specifically stated such. Kinda makes sense, right? Further considering New York law, the court explained that the New York rule, was a rebuttable presumption and that the will's silence in referring to the power of appointment, was the evidence needed to rebut the presumption. 
Next, the court considered the rules discussed much earlier in the presentation articulated, by the Uniform Power of Appointment Act, about choice of laws. The court explained that for purposes of construing a will, the law of the testators domicile should govern, which makes perfect sense, because wills are testamentary instruments. Accordingly, it determined that the choice of law rule for powers of appointment with respect to wills, should be the donees domicile, whereby Theodore's will did not exercise the power of appointment provided in his mother's trust. So, they found in favor of Theodore's estate. So, to summarize this section on applicable laws, we see that powers of appointment, are driven primarily by the Code and common law, but are codified with references to both in the Uniform Powers of Appointment Act and the states that adopted it or its versions. Now, because inheritances are considered gifts, special attention should be paid, when drafting to ensure gift tax rules, aren't inadvertently violated, while following estate tax rules. 
To summarize this section on applicable laws, we see that powers of appointment, are driven primarily by the Code and common law, but are codified with references from both in the Uniform Power of Appointment Act and the states that adopted it or its versions. Now, because inheritances are considered gifts, special attention should be paid, when drafting to ensure gift tax rules, aren't inadvertently violated, while following estate tax rules. Additionally, since appointments are also created in trust, practitioners should determine, whether clients made gifts of appointive property, after their trust had been established. Finally, jurisdiction and time play important roles in drafting powers of appointment, and can be considered using two basic rules. One, states create interests, but the Code determines how those interests are taxed. Two, the lapse or release of general powers of appointment, created before October 21st, 1942, are generally treated more favorably, than the lapse or release of those powers created post 1942. 
Now, having spent a large amount of time, reviewing definitions, concepts, rudimentary examples and applicable laws and statutes, lets closely consider two hypotheticals in the time that we have left. Our first hypo involves providing for future generations. Our client is a 28 year old tech genius, YTG, who's accumulated significant wealth. YTG has a home valued at $400,000 and an investment portfolio worth about $3.8 million. Now, they have asked us to prepare an estate plan, but they don't want anything fancy. However, they do want to ensure that their younger siblings and infant niece and nephew, always have a home and that their niece and nephew, receive a good college education. YTG is also engaged to be married. So, what kind of plan would we recommend using that would include powers of appointment? 
The first step in the analysis is whether we want to plan prospectively for YTG's future spouse. It wouldn't hurt, and it would probably be more efficient in the long term, as long as they get married. Accordingly, we could recommend that YTG either buy a marital home or a new family home. Regardless, YTG would provide a life estate in the family property for his siblings, niece and nephew. In addition to the life estate and the family property, provisions of YTG's plan would include, the donor's requirement for disinterested successor trustee, especially if the marriage occurs. A power to appoint income to the siblings, niece and nephew limited by an ascertainable standard and a stipulation that maintenance, does not mean maintenance received in a family law settlement and should not be construed as such. We should also note that the niece and nephew, are still too old to qualify a skip persons for GST trust planning. Third, a marital deduction trust for the potential spouse and later a QTIP on a portion of the trust, would also be limited to an ascertainable standard. Next, we need to consider scenarios that would upend our planning. For example, what if YTG and fiance break up, after YTG executes the trust? Well, if the trust references that fiance as my spouse, then according to most state laws, the marital trust would be deemed null. However, we know not to depend on that and to bring YTG in for an amendment and restatement immediately, but then YTG's estate may surpass a state tax threshold for their other beneficiaries, whereby a power to appoint income for life per stirpes, combined with maybe a five and five power for invading the trust corpus would probably work. Finally, even if planning prospectively with nuptials pending, YTG should have a prenuptial agreement in place. 
Now, our next hypothetical, involves Senior Judge Banks, SJB. I must pause to state that SJB is a fictional character in this presentation and any similarity or likeness to an actual person is purely coincidental and not the fault of the author. Now, SJB is in their third marriage. They have a spendthrift adult son, from one of the previous marriages, a grandchild who is a new lawyer, and from the current spouse, a five year old named Dax, who is fond of playing with gavels. We should also note that the current spouse is not as enthusiastic about the marriage as they once were. SJB is a multimillionaire with the power of appointment over assets left to them in their grandmother's trust, Lulu Bell Banks. Grandmother, Lulu Bell actually had two trusts. However, the relevant language for our purpose is found in the first trust as shown here. "Upon my death, I Lulu Bell Banks, "hereby bequeath to my only son MJB, "all property and income from the Honeywell Ranch property "in the MJB trust for life." Lulu Bell goes on to also create trust, a second trust for her grandchildren or her son's issues. Now, SJB's father MJB recently died intestate. 
So, before we approach planning with SJB's assets and family dynamics, we have to consider the implication of MJB's death. From the language, we can see that MJB had a testamentary, general power of appointment that was not exercised and therefore, yes, it lapsed. The question is whether grandma Lulu Bell, created the power of appointment before or after October 21st, 1942. If before then the value of the appointed property, will likely not be subject to an estate tax. If after then there probably will be an estate tax assessed to the property. So accordingly, if Honeywell Ranch generates sufficient property, then we may recommend SJB use resources from the ranch or other resources to pay the estate tax. Now, again, SJB is a multi-millionaire in a blended family with a son with holes in his pockets, a new lawyer grandson with a wee bit of law school debt, Dax the toddler and a spouse who's Frosty. SJB dying intestate would be a nightmare. So, where do we start with their plan? First, let's consider Frosty the spouse. Since this is a third marriage with children, born of different marriages. SJB does not want Frosty to inherit everything. 
Additionally, grandmother Lulu Bell, does not want her assets to be distributed outside of the family bloodline. Therefore our first recommendation for SJB, would be to establish a marital deduction trust for the benefit of Frosty, but limited by an ascertainable standard and prohibiting any allocation of assets from the Lulu Bell Trust for her grandchildren. But Dax is a descendant of Lulu Bell and SJB wants Dax to be treated equitably in that regard. So, what are the options in this scenario? Well, we could establish a separate trust solely for Dax, appointing a trustee and allocating a pro rata or equal interest from Lulu Bell's descendants trust basically. Then we could just create a descendants trust for all of Lulu Bell's descendants, Dax, the grandchild lawyer, and the spendthrift son. And then include maybe a power of appointment with respect to income for life, combined with a five and five power and prohibitions against reversionary interests, and also provisions that would provide a trustee succession that would satisfy SJB's intention and Lulu Bell's intention to keep the assets in the family. Finally, because it's unlikely that the assets, will dissipate upon Dax reaching adulthood. We could create GST planning to ensure that Lulu Bell Banks' legacy continues as shown here. The GST trust would be fully exempt for ease of administration purposes. So, if we take a step back, we should probably do a non-GST descendants trust with an inclusion ratio of one and a GST descendants trust with an inclusion ratio of zero and keep the allocations and return filings clean. We should use SJB's assets accumulated during their lifetime for the GST descendants trust.
 So, now you should have a good grounding on the mighty powers of appointment and how they can help you create dynastic legacies for your clients. As long as you're mindful of the several tax issues and common law issues that are implicated when drafting these provisions. Thank you so much for watching and listening.

Presenter(s)

MEJ
Max Elliott, JD
Founder and Managing Attorney
The Law Offices of Max Elliott

Credit information

Jurisdiction
Credits
Available until
Status
Alabama
    Not Offered
    Alaska
    • 1.0 voluntary
    Pending
    Arizona
    • 1.0 general
    Pending
    Arkansas
    • 1.0 general
    Pending
    California
    • 1.0 general
    Pending
    Colorado
    • 1.0 general
    Unavailable
    Connecticut
    • 1.0 general
    Pending
    Delaware
      Not Offered
      Florida
      • 1.0 general
      Pending
      Georgia
      • 1.0 general
      Unavailable
      Guam
      • 1.0 general
      Pending
      Hawaii
      • 1.0 general
      Pending
      Idaho
        Not Offered
        Illinois
        • 1.0 general
        Pending
        Indiana
          Not Offered
          Iowa
            Not Offered
            Kansas
              Not Offered
              Kentucky
                Not Offered
                Louisiana
                  Not Offered
                  Maine
                  • 1.0 general
                  December 31, 2026 at 11:59PM HST Self-apply
                  Minnesota
                    Not Offered
                    Mississippi
                      Not Offered
                      Missouri
                      • 1.0 general
                      Pending
                      Montana
                        Not Offered
                        Nebraska
                          Not Offered
                          Nevada
                          • 1.0 general
                          December 31, 2025 at 11:59PM HST Approved
                          New Hampshire
                          • 1.0 general
                          Pending
                          New Jersey
                          • 1.2 general
                          January 16, 2025 at 11:59PM HST Approved
                          New Mexico
                            Not Offered
                            New York
                            • 1.0 areas of professional practice
                            Pending
                            North Carolina
                            • 1.0 general
                            Unavailable
                            North Dakota
                            • 1.0 general
                            Pending
                            Ohio
                            • 1.0 general
                            Unavailable
                            Oklahoma
                              Not Offered
                              Oregon
                                Not Offered
                                Pennsylvania
                                  Not Offered
                                  Puerto Rico
                                    Not Offered
                                    Rhode Island
                                      Not Offered
                                      South Carolina
                                        Not Offered
                                        Tennessee
                                        • 1.0 general
                                        Pending
                                        Texas
                                        • 1.0 general
                                        Unavailable
                                        Utah
                                          Not Offered
                                          Vermont
                                          • 1.0 general
                                          Pending
                                          Virginia
                                          • 1.0 general
                                          Pending
                                          Virgin Islands
                                          • 1.0 general
                                          Pending
                                          Washington
                                            Not Offered
                                            West Virginia
                                              Not Offered
                                              Wisconsin
                                                Not Offered
                                                Wyoming
                                                  Not Offered
                                                  Credits
                                                    Available until
                                                    Status
                                                    Not Offered
                                                    Credits
                                                    • 1.0 voluntary
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1.0 general
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1.0 general
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1.0 general
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1.0 general
                                                    Available until
                                                    Status
                                                    Unavailable
                                                    Credits
                                                    • 1.0 general
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                      Available until
                                                      Status
                                                      Not Offered
                                                      Credits
                                                      • 1.0 general
                                                      Available until
                                                      Status
                                                      Pending
                                                      Credits
                                                      • 1.0 general
                                                      Available until
                                                      Status
                                                      Unavailable
                                                      Credits
                                                      • 1.0 general
                                                      Available until
                                                      Status
                                                      Pending
                                                      Credits
                                                      • 1.0 general
                                                      Available until
                                                      Status
                                                      Pending
                                                      Credits
                                                        Available until
                                                        Status
                                                        Not Offered
                                                        Credits
                                                        • 1.0 general
                                                        Available until
                                                        Status
                                                        Pending
                                                        Credits
                                                          Available until
                                                          Status
                                                          Not Offered
                                                          Credits
                                                            Available until
                                                            Status
                                                            Not Offered
                                                            Credits
                                                              Available until
                                                              Status
                                                              Not Offered
                                                              Credits
                                                                Available until
                                                                Status
                                                                Not Offered
                                                                Credits
                                                                  Available until
                                                                  Status
                                                                  Not Offered
                                                                  Credits
                                                                  • 1.0 general
                                                                  Available until

                                                                  December 31, 2026 at 11:59PM HST

                                                                  Status
                                                                  Self-apply
                                                                  Credits
                                                                    Available until
                                                                    Status
                                                                    Not Offered
                                                                    Credits
                                                                      Available until
                                                                      Status
                                                                      Not Offered
                                                                      Credits
                                                                      • 1.0 general
                                                                      Available until
                                                                      Status
                                                                      Pending
                                                                      Credits
                                                                        Available until
                                                                        Status
                                                                        Not Offered
                                                                        Credits
                                                                          Available until
                                                                          Status
                                                                          Not Offered
                                                                          Credits
                                                                          • 1.0 general
                                                                          Available until

                                                                          December 31, 2025 at 11:59PM HST

                                                                          Status
                                                                          Approved
                                                                          Credits
                                                                          • 1.0 general
                                                                          Available until
                                                                          Status
                                                                          Pending
                                                                          Credits
                                                                          • 1.2 general
                                                                          Available until

                                                                          January 16, 2025 at 11:59PM HST

                                                                          Status
                                                                          Approved
                                                                          Credits
                                                                            Available until
                                                                            Status
                                                                            Not Offered
                                                                            Credits
                                                                            • 1.0 areas of professional practice
                                                                            Available until
                                                                            Status
                                                                            Pending
                                                                            Credits
                                                                            • 1.0 general
                                                                            Available until
                                                                            Status
                                                                            Unavailable
                                                                            Credits
                                                                            • 1.0 general
                                                                            Available until
                                                                            Status
                                                                            Pending
                                                                            Credits
                                                                            • 1.0 general
                                                                            Available until
                                                                            Status
                                                                            Unavailable
                                                                            Credits
                                                                              Available until
                                                                              Status
                                                                              Not Offered
                                                                              Credits
                                                                                Available until
                                                                                Status
                                                                                Not Offered
                                                                                Credits
                                                                                  Available until
                                                                                  Status
                                                                                  Not Offered
                                                                                  Credits
                                                                                    Available until
                                                                                    Status
                                                                                    Not Offered
                                                                                    Credits
                                                                                      Available until
                                                                                      Status
                                                                                      Not Offered
                                                                                      Credits
                                                                                        Available until
                                                                                        Status
                                                                                        Not Offered
                                                                                        Credits
                                                                                        • 1.0 general
                                                                                        Available until
                                                                                        Status
                                                                                        Pending
                                                                                        Credits
                                                                                        • 1.0 general
                                                                                        Available until
                                                                                        Status
                                                                                        Unavailable
                                                                                        Credits
                                                                                          Available until
                                                                                          Status
                                                                                          Not Offered
                                                                                          Credits
                                                                                          • 1.0 general
                                                                                          Available until
                                                                                          Status
                                                                                          Pending
                                                                                          Credits
                                                                                          • 1.0 general
                                                                                          Available until
                                                                                          Status
                                                                                          Pending
                                                                                          Credits
                                                                                          • 1.0 general
                                                                                          Available until
                                                                                          Status
                                                                                          Pending
                                                                                          Credits
                                                                                            Available until
                                                                                            Status
                                                                                            Not Offered
                                                                                            Credits
                                                                                              Available until
                                                                                              Status
                                                                                              Not Offered
                                                                                              Credits
                                                                                                Available until
                                                                                                Status
                                                                                                Not Offered
                                                                                                Credits
                                                                                                  Available until
                                                                                                  Status
                                                                                                  Not Offered

                                                                                                  Become a Quimbee CLE presenter

                                                                                                  Quimbee partners with top attorneys nationwide. We offer course stipends, an in-house production team, and an unparalleled presenter experience. Apply to teach and show us what you've got.

                                                                                                  Become a Quimbee CLE presenter image