BILL ANALYSIS Ó
AB 2846
Page 1
Date of Hearing: May 3, 2016
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
AB 2846
(Maienschein) - As Introduced February 19, 2016
PROPOSED CONSENT (As Proposed to be Amended)
SUBJECT: POWER OF APPOINTMENTS
KEY ISSUE: SHOULD CERTAIN PROVISIONS OF THE UNIFORM POWERS OF
APPOINTMENT ACT DEVELOPED BY THE UNIFORM LAW COMMISSION BE
ADOPTED TO PROVIDE ADdITIONAL CLARITY IN ESTATE PLANNING?
SYNOPSIS
This non-controversial bill adopts several provisions of the
Uniform Law Commission's model legislation, Uniform Powers of
Appointment Act. A power of appointment is an estate planning
tool that provides an owner of property additional flexibility
in devising his or her estate. Depending on how a power of
appointment is structured, it may also provide families tax
advantages and protections against creditors.
Given that California's body of law relating to powers of
appointment has primarily been based on common law, this bill
seeks to clarify California's law on powers of appointment in
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order to provide further guidance to estate planners and
families on creating powers of appointment, consistent with the
donors' and powerholders' intent, and the rights of creditors.
This bill is sponsored by Executive Committee of the Trusts and
Estates Section of the State Bar (TEXCOM) and has no opposition
on file.
SUMMARY: Adopts several provisions of the Uniform Powers of
Appointment Act. Specifically, this bill:
1)Replaces the term "donee" with "powerholder" where applicable.
2)Defines "power of appointment" to mean a 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, an appointive property. The term does not
include a power of attorney.
3)Provides that if a powerholder exercises a power of
appointment in a disposition that also disposes of property
the powerholder owns, the owned property and the appointive
property shall be allocated in the permissible manner, in
accordance with the terms of the creating instrument, and that
best carries out the powerholder's intent.
4)Provides that unless the terms of the instrument creating or
exercising a power of appointment manifest a contrary intent,
if the powerholder makes a valid partial appointment to a
taker in default of appointment, the taker in default of
appointment may share fully in any unappointed property.
5)Provides that property covered by a special power of
appointment (which means the powerholder cannot give the
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property to himself or herself) is not subject to the claims
of creditors of the powerholder or of the powerholder's estate
or to the expenses of the administration of the powerholder's
estate unless provided otherwise.
6)Provides that property that is subject to a special power of
appointment shall be subject to the claims of creditors of the
powerholder or of the powerholder's estate or the expenses of
administration of the powerholder's estate under either of the
following circumstances:
a) To the extent that the powerholder owned the property
and, reserving the special power, transferred the property
in violation of the Uniform Voidable Transactions Act.
b) If the initial gift in default of the exercise of the
power is to the powerholder or the powerholder's estate.
7)Provides that property that is subject to a general power of
appointment created by the donor in the donor's favor, whether
or not presently exercisable is subject to the claims of the
donor's creditors or the donor's estate and to the expenses of
the administration of the donor's estate, except to the extent
the donor effectively irrevocably appointed the property
subject to the general power of appointment in favor of a
person other than the donor or the donor's estate.
8)Provides that a power of appointment is created only if (1)
there is a creating instrument; (2) the creating instrument is
valid under applicable law; (3) the creating instrument
transfers the appointive property unless provided otherwise;
and (4) the terms of the creating instrument manifest the
donor's intent to create in a powerholder a power of
appointment over the appointive property exercisable in favor
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of a permissible appointee.
EXISTING LAW:
1)Establishes that to the extent that the common law rules
governing powers of appointment are modified by statute, the
common law as to powers of appointment is the law of this
state. (Section 600 of the Probate Code. Unless stated
otherwise, all further statutory references are to the Probate
Code.)
2)Defines a donor as the person who creates or reserves a power
of appointment. (Section 610.)
3)Defines a donee as the person to whom a power of appointment
is given or in whose favor a power of appointment is reserved.
(Ibid.)
4)Distinguishes a general power of appointment from a special
power of appointment with the following rules:
a) A power of appointment is general only to the extent
that it is exercisable in favor of the donee, the donee's
estate, the donee's creditors, or creditors of the donee's
estate, whether or not it is exercisable in favor of
others.
b) A power to consume, invade, or appropriate property for
the benefit of a person in discharge of the donee's
obligation of support that is limited by an ascertainable
standard relating to the person's health, education,
support, or maintenance is not a general power of
appointment.
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c) A power exercisable by the donee 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 donee, the donee's estate, the
donee's creditors, or creditors of the donee's estate is
not a general power of appointment.
d) A power of appointment that is not "general" is
"special."
e) A power of appointment may be general as to some
appointive property, or an interest in or a specific
portion of appointive property, and be special as to other
appointive property. (Section 611.)
5)Provides that a power of appointment can be created only by a
donor having the capacity to transfer the interest in property
to which the power relates. (Section 620.)
6)Provides that property covered by a special power of
appointment is not subject to the claims of creditors of the
donee or of the donee's estate or to the expenses of the
administration of the donee's estate. (Section 681.)
7)Provides that property subject to an unexercised general power
of appointment created by the donor in the donor's favor,
whether or not presently exercisable, is subject to the claims
of the donor's creditors or the donor's estate and to the
expenses of the administration of the donor's estate.
(Section 683.)
8)Establishes the Uniform Voidable Transactions Act, which among
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other things, provides that certain acts to hinder, delay, or
defraud any creditor are voidable. (Civil Code Section 3439.)
FISCAL EFFECT: As currently in print this bill is keyed
non-fiscal.
COMMENTS: A power of appointment is an estate planning tool
which enables the owner of property (in this case, the donor) to
have additional flexibility in devising his or her estate.
Generally speaking, the donor vests with another person (the
donee or the powerholder) the power to designate who receives an
interest in the donor's property in accordance to the terms
established by the donor. Depending on the terms and
characteristics of the power of appointment, it may also provide
tax advantages and protections against creditors. Indeed,
"[p]owers of appointment are particularly helpful in this day
for long-term (dynasty) trusts that exploit the
generation-skipping transfer (GST) exemption and try to keep
property outside of the transfer tax system as long as
possible." (California Estate Planning (Cont.Ed.Bar 2007)
Powers of Appointment, § 9.2, p. 389.)
A power of appointment can be grouped into two types: general
and special. A general power of appointment vests the donee
with the ultimate power to decide who receives the appointive
property, including the power to appoint the property to him- or
herself. Indeed, a power of appointment is considered general
if it is exercisable in favor of the powerholder - even if it is
exercisable in favor of other permissible appointees. However,
there is an exception. If the power of appointment would allow
the powerholder to consume, invade, or appropriate the property,
limited to an ascertainable standard like health, education,
support or maintenance of the powerholder, this type of power of
appointment is not considered general; in other words, a power
of appointment that is limited by an ascertainable standard is
not subject to creditors. In comparison, a special power of
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appointment vests the donee with the power to decide among a
group of certain beneficiaries or permissible appointees.
Similar to property subject to a power of appointment limited by
an ascertainable standard, property subject to a special power
of appointment may not be reached by the donee's creditors.
When a power of appointment is drafted in an estate instrument,
it is common for the drafter (usually, an attorney) to specify
the extent of the power, and how the power may be exercised.
According to estate planning experts, it is common for a donor
to require the powerholder to exercise the power of appointment
by a testamentary will. Thus, by the time that the powerholder
has exercised the power, any badly-drafted terms must be
resolved by the beneficiaries, their attorneys, and the court.
In California, the body of law governing power of appointments
is based upon common law unless statute provides otherwise.
Many times, statutory rules are sufficient to instruct courts on
how to interpret certain phrases, terms, or situations; but, of
course, there are moments when there are no available default
rules, and courts must discern the intent of the powerholder's
exercise.
According to the author, this bill seeks to clarify the body of
statutory law on powers of appointment in order to provide
further guidance on the existing body of law relating to powers
of appointment, consistent with the donors' and powerholders'
intent, and the rights of creditors.
This bill adopts several provisions based on the 2013 Uniform
Powers of Appointment Act (UPOAA) approved by the Uniform Law
Commission, a non-partisan nationwide organization that seeks to
promote clarity and stability in areas of state statutory law.
This bill does not seek to adopt the entire UPOAA. Indeed, in
2014, this Committee reviewed AB 1622 (Bonta) which sought to
introduce the entire UPOAA. Based on the Committee's initial
questions on whether a wholesale adoption would confuse the body
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of law in California, and based on concerns raised by the Trusts
and Estates Section of the State Bar, AB 1622 was not heard by
this Committee.
The changes in this bill are modest. According to the author,
this bill is limited to certain provisions of the UPOAA in order
to address areas of the law that are currently silent or
ambiguous on powers of appointment. In summary, this bill, as
proposed to be amended, does the following things: (i) replaces
the term "donee" with "powerholder" as it relates to powers of
appointment; (ii) explicitly defines a power of appointment;
(iii) adopts the selective allocation doctrine as a rule of
construction; (iv) adopts a default rule that allows a
taker-in-default to share fully in unappointed property when the
powerholder makes a partial appointment to the taker-in-default;
(v) clarifies the instances when a power of appointment (general
and special) is subject to claims of creditors; and (vi)
provides how a power of appointment is created. This analysis
reviews each of these provisions in turn.
To reduce confusion among practicing attorneys, this bill
replaces the term "donee" with "powerholder." Under current
law, the person who is vested with the power to designate whom
receives an interest in the donor's property is considered the
donee. However, because the interchange between the terms donor
and donee is confusing to some (including practicing attorneys),
many courts have relied on the term "powerholder" to describe
the donee. As proposed to be amended, this bill adopts the
Uniform Law Commission approach and replaces the term "donee"
with "powerholder" throughout the Probate Code in those relevant
sections relating to powers of appointment.
Defines power of appointment and clarifies that a person vested
with a power of appointment is not a fiduciary. This bill
defines a "power of appointment" as a power that enables a
powerholder acting in a nonfiduciary capacity to designate a
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recipient of an ownership interest in or another power of
appointment over the appointive property, and provides that the
power does not include a power of attorney. This definition is
consistent with the development of a power of appointment.
Although there might be moments when a powerholder appoints
property to impermissible appointees, there should be a
fiduciary, such as a trustee or an executor (who owe fiduciary
duties) to stop the impermissible appointments, without resort
to the courts.
This bill adopts the selective allocation doctrine which
maximizes the effectiveness of the powerholder's exercise of the
power to ensure that the appointive property is not allocated to
impermissible appointees, but is also consistent with the
powerholder's intent. As previously mentioned, a donor may
restrict a power of appointment so that it can only be exercised
to a limited group of individuals or appointees. Since it is a
common practice for a powerholder to exercise the power of
appointment by testamentary instrument, a scenario arises when
the powerholder exercises the power over the (donor's)
appointive property, and also deposes the powerholder's own
property to individuals who are both permissible and
impermissible appointees.
This bill adopts the selective allocation doctrine.
Specifically, this bill, as proposed to be amended, provides
that if a powerholder exercises a power of appointment in a
disposition that also disposes of the property the powerholder
owns, the owned property and the appointive property shall be
allocated in the permissible manner in accordance with the terms
of the creating instrument and that best carries out the
powerholder's intent. By adopting the selective allocation
doctrine, this bill maximizes the effectiveness of the
powerholder's exercise of the power by ensuring that the
appointive property is allocated to permissible appointees, and
the powerholder's own assets are allocated to beneficiaries,
consistent with the intent of the powerholder-even if those
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beneficiaries happen to be impermissible appointees who did not
receive appointive property. Ultimately, the selection
allocation doctrine seeks to protect the powerholder's intent,
as long as the appointive property allocation is consistent with
the donor's intent.
For example, imagine that Grandmother Dawn has given her son,
Sonny, a special power of appointment to devise by will $1,000
to Sonny's daughters, Apple, Banana, Coconut; Dawn prohibits
Sonny from devising the appointive property to Sonny's son,
Eeyore. Sonny later dies with a $600 estate. In Sonny's will,
Sonny provides the following: "I give all my property in equal
shares to my children." In order to satisfy Sonny's intent of
giving each of his four children an equal amount of $400 ($1600
? 4), there are two steps. First, the appointive property of
$1,000 must be divided between Apple, Banana, and Coconut
($333.33 each). Then, Sonny's estate of $600 must be divided in
such a way that each child ends up with $400. Thus, from
Sonny's estate alone, Eeyore would receive $400, and Apple,
Banana, and Coconut would each receive $66.66. Under the
selective allocation doctrine, the allocation is consistent with
the donor's instructions, but is also consistent with the
powerholder's intent.
This bill adopts a default rule of construction that provides
that when a powerholder only makes a partial appointment to a
taker-in-default, the taker-in-default may also fully share in
the unappointed property. In the event that a powerholder does
not exercise the power of appointment, a well-drafted estate
plan may provide for what happens when the exercise doesn't
occur. Typically, property subject to a power that was not
exercised will flow to takers-in-default. Sometimes, a
powerholder will partially exercise the power; that is, the
powerholder only appoints some of the property, but not all of
it. Accordingly, the property subject to the remaining exercise
flows to the takers-in-default. A problem arises when a partial
exercise is made to an individual who happens to be a
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taker-in-default; the question is whether that individual also
gets to benefit from the remaining exercise. This bill adopts a
default rule of construction that provides that when a
powerholder makes a partial appointment to an individual who is
also taker-in-default, that individual will also get to benefit
from the unexercised appointive property.
For example, imagine the following factual scenario: an estate
plan provides for the following takers-in-default: Tim, Ina,
Dee, and Fred; the Powerholder makes the following exercise: "I
exercise my power of appointment directing that 25% of the
property go to Tim." Under this bill, 75% of the remaining
appointive property flows to Ina, Dee, Fred, and Tim (thus, Tim
gets 43.75%, and Ina, Dee, and Fred each get 18.75%). Although
the donor may override this default rule of construction to
ensure that the donor's intent controls, this bill presumes that
in the absence of the donor's specific instructions, a
taker-in-default who is treated as an appointee in a partial
exercise may still get to fully share the unappointed property
as a taker-in-default.
This bill clarifies the instances when a special power of
appointment is subject to claims of creditors. As previously
mentioned, a power of appointment is considered general if it is
exercisable in favor of the powerholder - even if it is
exercisable in favor of others. In contrast, a power of
appointment is considered special if it is exercisable in favor
of appointees that exclude the powerholder. Accordingly, a
creditor of a powerholder of a special power of appointment may
not reach the appointive property. Given that property subject
to a special power of appointment cannot be claimed by a
powerholder's creditors, some powerholders who hold a special
power of appointment try to escape creditors by impermissibly
transferring appointive property to themselves.
This bill provides that property covered by a special power of
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appointment is subject to creditors of a powerholder and
creditors of a powerholder's estate if: (1) the powerholder
owned the property and then reserved a special power, and
transferred the property in violation of the Uniform Voidable
Transactions Act; or (2) the initial gift in default of the
exercise of the power is to the powerholder or the powerholder's
estate. These rules are consistent with the body of law on
powers of appointment which seeks to provide flexibility in
estate planning, but also ensures that property is not being
transferred to escape creditors.
This bill clarifies the instances when a general power of
appointment is subject to claims of creditors. As previously
mentioned, a power of appointment is considered general if it is
exercisable in favor of the powerholder - even if it is
exercisable in favor of others. Thus, a general power of
appointment is subject to creditors of a powerholder and
creditors of the powerholder's estate.
Sometimes, a donor might create a general power of appointment,
and reserving a power to him- or herself. Then, the donor might
"exercise" a general power of appointment, in anticipation of
the possibility that a creditor will take action against the
donor, but then revoke the exercise of the general power once
the creditors have gone away. Existing law provides that
property subject to an unexercised general power of appointment
created by the donor in the donor's favor, whether or not
presently exercisable, is subject to the claims of the donor's
creditors or the donor's estate and to the expenses of the
donor's estate. This bill creates an exception-consistent with
the intent of the statute-that provides that an unexercised
general power of appointment is not subject to creditors if the
donor effectively and irrevocably appoints the property in favor
of a person other than the donor or the donor's estate.
Given that this the bill seeks to discourage fraudulent exercise
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of powers of appointment to avoid creditors, the author should
also consider whether these provisions should be expanded to
also apply to powerholders who might seek to
exercise-and-later-revoke a power of appointment to avoid
creditors.
As proposed to be amended, this bill clarifies how a power of
appointment may be created. As previously stated, this bill
adds the definition of "power of appointment" to statute.
Current law also defines the "creating instrument" to mean the
deed, will, trust, or other writing or document that creates or
reserves the power of appointment. However, current law does
not specify how a power of appointment is to be created.
Indeed, a California estate planning practice guide appears to
agree:
Another basic requirement should be that the exercise be in
writing. Surprising as it may seem, the statute does not
require a writing, merely that the powerholder manifest his
or her intent to exercise a power. (California Estate
Planning (Cont.Ed.Bar 2007) Powers of Appointment, § 9.40,
p. 407.)
As proposed to be amended, this bill provides that a power of
appointment is created only if: (1) there is a creating
instrument; (2) the creating instrument is valid under
applicable law; (3) the creating instrument transfers the
appointive property unless provided otherwise; and (4) the terms
of the creating instrument manifest the donor's intent to create
in a powerholder a power of appointment over the appointive
property exercisable in favor of a permissible appointee.
REGISTERED SUPPORT / OPPOSITION:
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Support
Executive Committee of the Trusts and Estates Section of the
State Bar (TEXCOM)
Opposition
None on file
Analysis Prepared by:Eric Dang / JUD. / (916) 319-2334