San Diego Estate Planning Lawyer Blog
An important tool of California estate planning is the power of appointment. A person making a will (a testator) can name a donee–the person who will exercise the power of appointment–to dispose of the testator’s property at a future date. For example, John Smith can make a power of appointment designating his brother, Phil Smith, to dispose of his book collection after his death. John can leave it up to Phil to decide who should get the books, or he could restrict the power by saying, for instance, that the books should be divided among Phil’s children as Phil sees fit.
The power of appointment is governed under California law and federal tax regulations. According to IRS rules, if the testator makes a “general” power of appointment–John leaves his books to Phil for him to distribute as he wishes–then for federal estate tax purposes, the books are considered the property of Phil and not John’s estate. Thus, the value of the books would not be factored into any estate tax levied against John’s estate.
In order for a general power of appointment to be general, however, the person exercising the power must have the authority to use the property himself. In other words, if Phil can keep some or all of the books for himself (or his estate, or to pay off his creditors after his death), then John has executed a general power of appointment. It doesn’t matter whether Phil ultimately keeps or uses the books himself, only that he has the legal right to do so.
There is also a category for special powers of appointment. A special power is when the testator instructs the donee to distribute property to a group of people that does not include the donee, the donee’s estate or the donee’s creditors. Thus, if John instructs Phil to divide his books among Phil’s children, that is a special power of appointment.
Exclusive vs. Nonexclusive Powers Under California Law
Special powers are furthered divided into exclusive and nonexclusive appointments. An exclusive power means the donee can exclude one or more members of the class named by the testator. A nonexclusive power, in contrast, requires the donee to distribute some amount of the property to each class member. So if John made an exclusive power to Phil regarding the books, Phil could decide to give all of the books to one of his children and none to the others; if John made a nonexclusive power, Phil would have to give some books to each child, though not necessarily an equal amount.
In May 2012 a California appeals court panel in San Diego decided an unusual case involving the distinction between exclusive and nonexclusive powers of appointment. The caseinvolved a will that was first probated back in 1955. J.W. Sefton, Jr., left his estate in trust and gave a power of appointment to his son, Thomas W. Sefton, with instructions to distribute 75% of the trust assets to Thomas’ three children upon the son’s death (assuming the children survived their father). When Thomas died in 2006, his will exercised the power of appointment, dividing the 75% of J.W.’s estate among two of the grandchildren, excluding the third entirely.
Under current California law, adopted in 1970, a special power of appointment is considered exclusive unless the testator expressly provides otherwise. But since J.W.’s will was signed in 1955, the excluded grandchild claimed his father’s action was invalid. Before 1970 the common law in California was that powers of appointment were presumed to be nonexclusive. The court of appeals said the pre-1970 rule applied in this case and therefore, the grandchild was entitled to at least some of the trust assets.
The current presumption of exclusivity means it’s important for anyone looking to use a power of appointment in his or her will to be crystal clear as to intent. If you want to make sure a group of beneficiaries such as your children all receive part of an appointed property, you must expressly instruct the donee in that regard. The law does permit you to designate minimum or maximum shares that the donee must distribute.
An experienced California estate planning attorney can work with you to decide if a power of attorney is appropriate for your estate, and if it is, how to tailor the language so that your wishes are honored. Feel free to contact the Law Office of Scott Soady to discuss this and any other estate planning questions you may have.