BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 2846 (Maienschein)
Version: May 9, 2016
Hearing Date: June 21, 2016
Fiscal: No
Urgency: No
ME
SUBJECT
Powers of appointment
DESCRIPTION
To clarify statutory law related to powers of appointment, this
bill would replace the term "donee" with "powerholder" in the
powers of appointment portion of the Probate Code to avoid
confusion; explicitly define a "power of appointment;" provide
how a power of appointment is created; clarify the instances
when a power of appointment is subject to claims of creditors;
adopt the selective allocation doctrine as a rule of
construction; and adopt 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.
BACKGROUND
Current law provides a statutory body of law relating to powers
of appointment, including the creation and exercise of, and the
revocability of the creation, exercise, or release of, a power
of appointment. A power of appointment is an estate planning
tool that provides an owner of property additional flexibility
in devising his or her estate. A power of appointment is a
traditional feature of property law that permits the owner of
property to name a third party and give that person the power to
direct the distribution of property among some class of
permissible beneficiaries. The power of appointment may also be
structured to provide tax advantages and protections from
creditors. Existing law 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. Existing
law defines a person to whom a power of appointment is given or
in whose favor a power of appointment is reserved as a "donee."
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This bill contains provisions that would make California's power
of appointment laws, codified at Probate Code Section 610, et
seq., more user-friendly. The provisions of this bill are
generally modeled after a few provisions of the Uniform Law
Commission's model Uniform Powers of Appointment Act. The
provisions of this bill clarify California's law on powers of
appointment in order to provide further guidance to estate
planners and families in creating powers of appointment that are
consistent with the donors' and powerholders' intent and the
rights of creditors. Accordingly, this bill replaces the term
"donee" with "powerholder" in the powers of appointment portion
of the Probate Code to avoid confusion, explicitly defines a
"power of appointment," provides how a power of appointment is
created, and clarifies the instances when a power of appointment
is subject to claims of creditors. This bill also adopts the
selective allocation doctrine as a rule of construction and
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.
CHANGES TO EXISTING LAW
Existing law relating to powers of appointment defines
"appointee" as the person in whose favor a power of appointment
is exercised. (Prob. Code Sec. 610(a).)
Existing law relating to powers of appointment defines
"appointive property" as the property or interest in property
that is the subject of the power of appointment. (Prob. Code
Sec. 610(b).)
Existing law relating to powers of appointment defines "creating
instrument" as the deed, will, trust, or other writing or
document that creates or reserves the power of appointment.
(Prob. Code Sec. 610(c).)
Existing law relating to powers of appointment defines "donee"
as the person to whom a power of appointment is given or in
whose favor a power of appointment is reserved. (Prob. Code
Sec. 610(d).)
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This bill replaces the word "donee" with "donor" and defines a
"donor" as the person who creates or reserves a power of
appointment.
Existing law relating to powers of appointment defines
"permissible appointee" as a person in whose favor a power of
appointment can be exercised. (Prob. Code Sec. 610(f).)
This bill defines "power of appointment" as 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 the appointive property.
This bill specifies that "power of appointment" does not include
a power of attorney.
This bill defines "powerholder" as the person to whom a power of
appointment is given or in whose favor a power of appointment is
reserved.
Existing law provides that a power of appointment can only be
created by a donor having the capacity to transfer the interest
in property to which the power relates. (Prob. Code Sec. 620.)
This bill provides that a power of appointment is created only
if all of the following are satisfied:
there is a creating instrument;
the creating instrument is valid under applicable law;
the creating instrument transfers the appointive property (but
this does not apply to the creation of a power of appointment
by the exercise of a power of appointment); and
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.
This bill provides that if a powerholder exercises a power of
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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.
This bill , 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 unappointed property.
Existing law establishes the Uniform Voidable Transactions Act,
which provides that certain acts to hinder, delay, or defraud
any creditor are voidable. (Civ. Code Sec. 3439.)
Existing law provides that a power of appointment is a general
power of appointment 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 theirs. (Prob. Code Sec. 611(a).)
Existing law provides that 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. (Prob. Code Sec. 611(b).)
Existing law provides that 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. (Prob. Code Sec. 611(c).)
Existing law provides that a power of appointment that is not
"general" is special. (Prob. Code Sec. 611(d).)
Existing law provides that 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. (Prob. Code Sec. 611(e).)
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Existing law provides that property covered by a special power
of appointment (which means the powerholder cannot give the
property to himself/herself) 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. (Prob.
Code Sec. 681.)
This bill provides that property covered by a special power of
appointment (which means the powerholder cannot give the
property to himself/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, except that property subject to the 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 when:
the powerholder owned the property and, reserving the
special power, transferred the property in violation of the
Uniform Voidable Transactions Act (Chapter 1 (commencing
with Section 3439) of Title 2 of Part 2 of Division 4 of
the Civil Code); or
the initial gift in default of the exercise of the power
is to the powerholder or the powerholder's estate.
Existing law provides that property subject to an unexpired
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. (Prob.
Code Sec. 683.)
This bill provides that property 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.
COMMENT
1. Stated need for the bill
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According to the author:
A power of appointment is a traditional feature of
property law that permits the owner of property to name a
third party and give that person the power to direct the
distribution of that property among some class of
permissible beneficiaries to add flexibility to the estate
plan. This bill introduces provisions to clarify issues
regarding the creation, exercise, and release of powers of
appointment over trust property in a manner consistent
with common law.
This bill proposes amendments to clarify the scope and
type of powers subject to these rules, provide guidance
regarding operation of powers of appointment consistent
with the donors' and powerholders' intentions, and clarify
the rights of creditors with respect to property subject
to powers of appointment.
2. Makes existing power of appointment law more user friendly
This bill makes current power of appointment law more
user-friendly. This is accomplished by replacing the term
"donee" in the power of appointment portion of the Probate Code
with the term "powerholder." The use of the term "donee"
throughout the power of appointment portion of the Probate Code
is unnecessarily confusing because the term "donee" exists
throughout the Probate Code with a definition which conflicts
with the definition of "donee" in the context of the power of
appointment. As explained by the sponsor, this "is confusing,
as the term 'donee' also may refer to donees who receive
property through gifts or bequests, or who receive the
appointive property pursuant to exercise of a power of
appointment by the person who holds that power." It is
appropriate to replace the term "donee" with the term
"powerholder." Notably, the definition of "donee" for this
power of appointment portion of the Probate Code does not
change. However, the more appropriate term of "powerholder" is
used in its stead. Additionally and importantly, the term
"donee" is replaced throughout the power of appointment portion
of the Probate Code (Probate Code Section 600 et seq. (part 14
of Division 2) with the more accurate term of "powerholder" to
describe the person who holds the power of appointment.
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The power of appointments portion of the Probate Code is further
enhanced by placing into the power of appointment section of the
Probate Code the definition of "power of appointment" that is
appropriate to this portion of law. Accordingly, it is made
clear that the traditional "power of appointment" for trust law
purposes is distinguished from powers held by fiduciaries, such
as "agents" under powers of attorney. Under this bill, "power
of appointment" would be defined as "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 the appointive property." The statute further
clarifies that "power of appointment" in this portion of the
Probate Code does not include a power of attorney.
The bill also places into statute what criteria need to be
satisfied for a valid power of appointment to be created.
Specifically, all of the following must be satisfied to create a
power of appointment:
there is a creating instrument;
the creating instrument is valid under applicable law;
the creating instrument transfers the appointive property (but
this does not apply to the creation of a power of appointment
by the exercise of a power of appointment); and
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.
3. Adopts National Conference of Commissioners on Uniform
State Laws (NCCUSL) recommendation regarding the selective
allocation doctrine
This bill would adopt the selective allocation doctrine in an
effort to protect the powerholder's intent as long as the
appointive property allocation is consistent with the donor's
intent.<1> This bill codifies the rule of selective allocation
as follows: "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
---------------------------
<1> The Selective Allocation Doctrine is part of the Uniform
Powers of Appointment Act of 2013. See National Conference of
Commissioners on Uniform State Law, Uniform Powers of
Appointment Act, (Sep. 24, 2013) pp. 30-32.
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allocated in the permissible manner in accordance with the terms
of the creating instrument and that best carries out the
powerholder's intent. It is common for a donor to restrict a
power of appointment so that it can only be exercised (by the
powerholder) to a limited group of individuals (permissible
appointees). A powerholder oftentimes specifies in his/her
testamentary instrument how they wish to exercise their power of
appointment. In that same testamentary document, the person,
who happens to also be the powerholder may also indicate their
wishes to dispose their own property to individuals who are
permissible appointees and impermissible appointees. This bill
adopts the selective allocation doctrine to resolve this
situation. The selective allocation doctrine seemingly strikes
a balance in protecting the powerholder's intent while also
ensuring that the appointive property allocation is consistent
with the donor's intent.
The following example, provided by the author, demonstrates how
the selective allocation doctrine is consistent with the donor's
instructions and also consistent with the powerholder's intent:
D died, leaving a will that devised property worth
$100,000 to T in trust. T is directed to pay the net
income to S (Donor's son) for life and then "to pay the
principal to S's descendants as S shall by will appoint,
and in default of appointment to pay the principal by
representation to S's descendants then living, and if no
descendant of S is then living, to pay the principal to
X-Charity." S dies. The trust property over which S has
the special (limited) power of appointment (the
"appointive property") is worth $200,000 at his death.
S's owned property at his death is worth $800,000. S's
will provides as follows: "All property I own or over
which I have any power of appointment shall be used first
to pay my debts, expenses of administration, and death
taxes, and the balance I give outright to my daughters."
S's debts plus the death taxes payable on S's death plus
the expenses of administering S's estate total $200,000.
If the appointive property is allocated pro rata to the
payment of such $200,000 of debts/taxes, one-fifth of the
$200,000 would be an ineffective appointment, because it
would benefit impermissible appointees. That one-fifth of
$200,000 ($40,000 of the appointive property) would pass
in default of appointment, and S's own personal property
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would have to pick up the full payment of the debts,
taxes, and expenses of administration. A selective
allocation in the first instance of S's own personal
property to the payment of debts, taxes, and expenses of
administration preserves the appointive property as
appointed only to permissible appointees of the special
power of appointment, and nothing passes under the default
clause.
According to comments by the NCCUSL, in the Uniform Powers of
Appointment Act:
The result of applying selective allocation is always one
that the powerholder could have provided for in specific
language, and one that the powerholder most probably would
have provided for had he or she been aware of the
difficulties inherent in the dispositive scheme. By the
rule of selective allocation, courts undertake to prevent
the dispositive plan from being frustrated by the
ineptness of the powerholder or the powerholder's lawyer.
For an early case adopting selective allocation, see Roe
v. Tranmer, 2 Wils. 75, 95 Eng. Rep. 694 (C.P. 1757).
(National Conference of Commissioners on Uniform State Law,
Uniform Powers of Appointment Act, (Sep. 24, 2013) p. 31)
4. Codifies the NCCUSL recommendation regarding disposition of
unappointed property if partial appointment to taker in default
The author notes that the "Probate Code currently does not
address the issue of the ability of a taker in default to share
in the unappointed property remaining after operation of a
partial exercise of a power of appointment in favor of that
taker." This bill would adopt the NCCUSL recommendation and
codify the following:
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 unappointed property.
According to the NCCUSL's comments in support of codifying their
recommendation regarding the disposition of unappointed property
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if partial appointment to taker in default:
If a powerholder makes a valid partial appointment to a
taker in default, leaving some property unappointed, there
is a question about whether that taker in default may also
fully share in the unappointed property. In the first
instance, the intent of the donor controls. In the absence
of any indication of the donor's intent, it is assumed
that the donor intends that the taker can take in both
capacities. This rule presupposes that the donor
contemplated that the taker in default who is an appointee
could receive more of the appointive assets than a taker
in default who is not an appointee. The donor can defeat
this rule by manifesting a contrary intent in the
instrument creating the power of appointment, thereby
restricting the powerholder's freedom to benefit an
appointee who is also a taker in default in both
capacities. If the donor has not so manifested a contrary
intent, the powerholder is free to exercise the power in
favor of a taker in default who is a permissible
appointee. Unless the powerholder manifests a contrary
intent in the terms of the instrument exercising the
power, it is assumed that the powerholder does not intend
to affect in any way the disposition of any unappointed
property.
The rule of this section is consistent with, and this
Comment draws on, Restatement Third of Property: Wills and
Other Donative Transfers § 19.24 and the accompanying
Commentary.
The author offers the following example to illustrate where this
doctrine is helpful:
D died, leaving a will that devised property worth
$100,000 to T in the XYZ Trust for the benefit of S
(Donor's son) for life and then "to pay the principal to
S's descendants as S shall by will appoint, and in default
of appointment to pay the principal by representation to
S's descendants then living, and if no descendant of S is
then living, to pay the principal to X-Charity." S dies.
S's will provides as follows: "I exercise my power of
appointment over the XYZ Trust by directing that 25% of
the trust property of the XYZ Trust shall be distributed
outright to my daughter, D." S partially exercised his
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power of appointment to give 25% of the XYZ Trust to D,
but does not exercise his power of appointment over the
remaining 75% of the XYZ Trust. This proposed statute
would clarify that D also shares in the distribution of
the unappointed 75% balance of XYZ Trust along with S's
other living descendants, and that the partial appointment
of 25% to D does not preclude her from sharing in that 75%
distribution.
5. Clarifies instances when a special power of appointment is
subject to claims of creditors and when a general power of
appointment is subject to claims of creditors
Under the Probate Code, a power of appointment is general if it
is exercisable in favor of the powerholder, even if it is
exercisable in favor of others. A power of appointment is
considered special if it is exercisable in favor of appointees
that exclude the powerholder. Additionally the Probate Code
specifies that a power of appointment that is not "general " is
"specific." A creditor of a powerholder of a special power of
appointment may not reach the appointive property. According to
the author, when the bright line rule under Probate Code that
any power of appointment that is not general is special, is
coupled with the rule that property subject to a special power
of appointment is not subject to the claims of creditors, leads
to situations where "creative debtors [can] engage in effective
(fraudulent) creditor avoidance planning." For these reasons,
the author seeks to codify two circumstances under which a
creditor may reach property subject to a special power of
appointment. Accordingly, this bill would provide that property
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 these circumstances:
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; or
if the initial gift in default of the exercise of the power is
to the powerholder or the powerholder's estate.
Additionally, according to the author, the probate code
currently "leaves open the possibility that a powerholder may
'exercise' a general power of appointment in anticipation of
possible creditor action against the powerholder, but then later
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revoke the exercise of the power." Although, as the author
notes, a "court could void such an 'exercise' of a power of
appointment as a fraudulent transfer," the bill would codify a
straightforward rule 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. Codifying
these rules would arguably ensure that property is not being
transferred to improperly escape creditors while also still
providing flexibility in estate planning.
Support : None Known
Opposition : None Known
HISTORY
Source : Executive Committee of the Trusts & Estates Section of
the State Bar of California (TEXCOM)
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Assembly Floor (Ayes 78, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
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