ORANGE COUNTY BAR ASSOCIATION TRUSTS & ESTATES SECTION WEBINAR Powers of Appointment: Everything You Need to Know from the Planning and Litigation Perspectives Wednesday, August 12, 2020 Powers of Appointment: Everything You Need to Know From the Planning and Litigation Perspectives Orange County Bar Association, Trusts & Estates Section August 12, 2020 Catherine M. Swafford, Esq. & Helen Cheng, Esq. Withers Bergman, LLP 101 W. Broadway, Suite 1000 San Diego, CA 92101 [email protected] [email protected] London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Introduction Outline: 1. Powers of Appointment Generally 2. Tax and Planning Issues 3. Potential Litigation Issues London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally What is a power of appointment? • A power given to someone to dispose of property. • A power conferred by the owner of property upon another person to designate the persons who will receive the property. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d What is the purpose of a power of appointment? • To provide for flexibility after the settlor is no longer able to make changes to his/her estate plan. • Situations evolve and the world is constantly changing. • Controlling distributions from the grave. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code v. Common Law • California Powers of Appointment Act - Probate Code §§ 600-695. • Probate Code § 600: except to the extent the common law rules governing powers of appointment are modified by statute, the common law as to powers of appointment remain the law of California. • Probate Code § 601: if the law existing at the time of the creation of a power of appointment and the law existing at the time of the release or exercise of the power of appointment or at the time of the assertion of a right given by this part differ, the law existing at the time of the release, exercise, or assertion of a right controls. “Nothing in this section makes invalid a power of appointment created before July 1, 1970, that was valid under the law in existence at the time it was created.” London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code § 610 – Definitions • “Appointee” – person in whose favor a power of appointment is exercised • “Appointive Property” – property that is the subject of the power of appointment • “Creating Instrument” – the document creating the power of appointment • “Donor” – person who creates the power of appointment • “Permissible appointee” – person in whose favor a power of appointment can be exercised • “Powerholder” – person to whom a power of appointment is given • “Power of Appointment” – power that enables a powerholder acting in a nonfiduciary capacity to designate a recipient of an ownership interest in, or another power of appointment over, the appointment property. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code § 611 – General and Special Powers • General: a power of appointment is “general” only to the extent it is exercisable in favor of the powerholder, the powerholder’s estate, the powerholder’s creditors, or creditors of the powerholder’s estate, whether or not it is exercisable in favor of others. • Special: a power of appointment that is not “general” is “special.” • A power of appointment may be general as to some appointive property, or an interest in or a specific portion of appointive property, and special as to other appointive property. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code § 611 – General and Special Powers • Not a “General” Power of Appointment – a power to consume, invade, or appropriate property for the benefit of a person in discharge of the powerholder’s obligation of support that is limited by an ascertainable standard relating to the person’s health, education, support, or maintenance. • Not a “General” Power of Appointment – a power exercisable by the powerholder only in conjunction with a person having a substantial interest in the appointive property that is adverse to the exercise of the power in favor of the powerholder, the powerholder’s estate, the powerholder’s creditors, or creditors of the powerholder’s estate. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code § 650 – general power of appointment • The powerholder of a general power of appointment may make an appointment: • Of all of the appointive property at one time, or several partial appointments at different times, where the power is exercisable inter vivos. • Of present or future interests or both. • Subject to otherwise lawful restraints on the alienation of the appointed interest. • In trust. • Creating a new power of appointment. • The foregoing list is illustrative, not exclusive. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code § 651 – special power of appointment • Subject to the limitations imposed by the creating instrument, the powerholder of a special power may make any of the types of appointment permissible for the powerholder of a general power under § 650. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code § 652 – appointive share or amount in special powers • The powerholder of a special power of appointment may appoint the whole or any part of the appointive property to any one or more of the permissible appointees and exclude others. • However, if the donor specifies either a minimum or maximum share or amount to be appointed to one or more of the permissible appointees, the exercise of the power must conform to the specification. • There is case law concerning these requirements. See below. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code § 612 – testamentary powers; presently exercisable; not presently exercisable; postponed powers • A power of appointment is “testamentary” if it is exercisable only by a will. • A power of appointment is “presently exercisable” at the time in question to the extent that an irrevocable appointment can be made. • A power of appointment is “not presently exercisable” if it is “postponed.” A power of appointment is “postponed” in either of the following circumstances: • The creating instrument provides that the power may be exercised only after a specified act or event occurs or a specified condition is met, and the act or event has not occurred or the condition has not been met. • The creating instrument provides that an exercise of the power of appointment is revocable until a specified act or event occurs or a specified condition is met, and the act or event has not occurred or the condition has not been met. London l Cambridge l Geneva l Milan l Padua l Sydney l Hong Kong l Singapore l Tokyo New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco l British Virgin Islands Powers of Appointment Generally – Cont’d Probate Code § 613 – imperative powers and discretionary powers • A power of appointment is “imperative” where the creating instrument manifests an intent that the permissible appointees be benefitted even if the powerholder fails to exercise the power. An imperative power can exist even though the powerholder has the privilege of selecting some and excluding others of the designated permissible appointees. • All other powers are “discretionary.” The powerholder of a discretionary power is privileged to exercise, or not exercise, the power as the powerholder chooses.