Article on Powers of Appointment Under The Restatement of Property
Consider how the power of appointment device can be used by contemporary estate planners to achieve important non-tax dispositive goals: flexibility, control and creditor protection. Client wants to create a testamentary trust for Client‘s child, Sonny, for life, and then Client‘s grandchildren. Client does not like the rigidity of fixed remainders that would result if the remainder was simply left to his grandchildren. Rather he wants Sonny to decide up until his death how the trust principal will be enjoyed by Client‘s grandchildren.
One solution is to give the son a nongeneral (special), exclusionary (exclusive) testamentary power of appointment pursuant to which Sonny will name in his will who among the grandchildren will take and in what proportions. In this way, the trust remains flexible until Sonny dies and gives Sonny control over the principal without subjecting the principal to Sonny‘s creditors. In addition, the trust principal will not be subject to federal estate taxation on Sonny‘s death. Nor will federal GST tax be imposed on the trust principal when Sonny dies if Client allocated his GST exemption to produce a zero inclusion ratio.
Client could have given Sonny even greater control by permitting Sonny to appoint to anyone other than himself, his creditors, Sonny‘s estate or estate creditors. Creditor and tax immunity would still result.
What are the rules for the power of appointment device? For example, what arrangements should be treated as a power of appointment? What are the rules for creating powers of appointment? For exercising powers? Is property subject to a power of appointment always insulated from creditors? For over 60 years, the American Law Institute has addressed these and other issues in its efforts to provide some coherence to the body of powers of appointment law.
As part of the latest Restatement of Property project, the American Law Institute undertook to update the law of powers of appointment. The Institute=s process was explained in the Tentative Draft on powers of appointment:
Each portion of an Institute project is submitted initially for review to the project= s Consultants or Advisors as a Memorandum, Preliminary Draft, or Advisory Group Draft. As revised, it is then submitted to the Council of the Institute in the form of a Council Draft. After review by the Council, it is submitted as a Tentative Draft . . . for consideration by the membership at the Institute=s Annual Meeting. At each stage of the reviewing process, a Draft may be referred back for revision and resubmission.
Earlier drafts of the material contained in [the Tentative] Draft on powers of appointment are contained in:
Council Draft No. 5 (2005)
Preliminary Draft No. 11 (2005)
In May of 2006, the membership of the ALI approved the Tentative Draft on powers of appointment for publication in the Restatement (Third) of Property: Wills and Other Donative Transfers (hereinafter Restatement (Third) of Property). In late 2011, the powers of appointment topic was published in Volume 3 of the Restatement (Third) of Property.
My purpose in writing this paper is to highlight decisions made in the Powers of Appointment Division of the Restatement (Third) of Property. Of necessity, only selected issues will be addressed since the Powers of Appointment Division runs over 225 pages. My focus will be on issues that will confront estate planners, including to some extent issues that may arise for estate planners under powers that are created by non-lawyers and lawyers not well-versed in powers of appointment law. Also, consistent with the Restatement‘s treatment, my primary focus will be on powers of appointments in trusts.
Overall, I believe that the latest Restatement‘s treatment of powers of appointment is a commendable and important piece of work that will provide significant guidance to lawyers and judges in all states. This will be especially true in states like Texas which has little statutory law on powers of appointment. The latest Restatement‘s treatment of powers of appointment will also form the basis for a Uniform Powers of Appointment Act that the National Conference is presently working on.