A DISCUSSION ON POWERS OF APPOINTMENT

A Power of Appointment should not be confused with a Power of Attorney or the positive aspects of keeping a calendar of appointments. A Power of Attorney is a crucial estate planning tool in many situations but not all of your calendar of appointments are crucial to you being where you are supposed to be when you are supposed to be there.

A Power of Appointment, in a Will or Trust, gives the authority to a person, named in the document, to determine the ultimate distribution and terms of distribution in a manner and within the limits specified. The Power of Appointment may be very broad and could cause, as a result of the Power (even without it being exercised) the inclusion of the value of the estate in the estate of the agent named to exercise the Power. Or the Power of Appointment may be limited to a specific class of beneficiaries (e.g., “among my children living at the time of my death”), in which case the assets to be distributed are not included in the agent’s estate, by virtue of the limited Power of Appointment.

The document providing for the Power of Appointment should set forth the manner in which the Power may be exercised (in any writing referring to the Power; in a Will; in their last Will; in their Will admitted to probate).

The document providing for the Power of Appointment should also specify whether the Power is general or limited; and, inclusive or exclusive.

In an Appellate Court decision from the Fourth Appellate District, the Court issued a decision overturning a trial court decision concerning a Power of Appointment. In Sefton v. Sefton (May 31, 2012, D059211) ___Cal.App.4th. ___ [2012 Cal.App. Lexis 643], out of San Diego Co., the Court had to decide what law to apply to the exercise of a Power of Appointment which was exercised to exclude one beneficiary from inheriting. Common law was in effect when the document creating the Power of Appointment was executed and when the creator of the Power of Appointment died. California had a statute on Powers of Appointment and it was later rescinded. After the death of the creator of the Power, but before the exercise of the Power of Appointment by his son, a new law was put in effect—Prob. Code § 652. This law was in effect when the holder of the Power wrote his Will referring to the Power of Appointment and excluding one person in the class of beneficiaries from inheriting. Several years later he died and the exercise of the Power of Appointment became irrevocable.

WHY IT MATTERS

In his Trust of 1955, Grandpa (who died in 1966) left a life estate to his son (“Father”) with the remainder to his three grandchildren living at the time of his death and subject to a Power of Appointment to Father, the father of the three children. One of the children was from Father’s first marriage and two were from his later marriage. Father died in 2006 leaving a Will exercising the Power of Appointment (over assets which may total several hundred million dollars) to exclude his first son.

Excluded son contested the exercise of the Power of Appointment to exclude him. The trial court sustained a demurrer by the Trustee and other heirs, without leave to amend. Thus adopting the position that the 1970 law, with retroactivity, applied, and was “inclusive,” allowing the total exclusion of a beneficiary. The Trustee and other beneficiaries also argued that the petition by the eldest son should be denied as violating the three year statute of limitations. They wished to start the three years from the date Father exercised the Power of Appointment by mentioning it in his Will. The Appellate Court dismissed this argument stating that their father was still alive at that time and thus excluded son number one had no claim against his father then. The exercise of the Power of Appointment could have been changed at anytime up to his death. Only at his death was the exercise irrevocable, commencing the statute of limitations.

The Court discussed the retroactive effect of the 1970 Act and the need to carry-out the clear intention of the Grandfather, with the execution of his estate plan and his death, coming prior to the 1970 legislation.

Estate of Sloan (1935) 7 Cal.App.2d 319 [46 P.2d 1007] was the law in effect when the estate plan was executed and when Grandpa died. Estate of Sloan applied the exclusive rule regarding Powers of Attorney which means all of the members of the class of beneficiaries must receive what the court determines is a “substantial” portion of the estate. Contrary to that rule, the 1970 statue was “inclusive” and allowed the exercise of the Power of Appointment to exclude some beneficiaries, benefit some over others, or set terms on the inheritance.

The Appellate Court found that the law in effect when Grandpa executed his estate plan, and when he died, which he is presumed to have known and depended on in his estate plan, would apply.

Read the Sefton case for a discussion of Powers of Appointment; retroactivity; and, inclusiveness versus exclusiveness.

                                 _________________________________
                                 John T. Anderson, Section Chair
                                 Certified Specialist in Probate, Trust and Estate Planning
                                 By the California State Bar Board of Legal Specialization

Copyright © 2012 by John T. Anderson

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