New Power of Appointment Legislation – On July 22, 2016, Governor Brown signed the AB 2846 legislation (authored by Assemblyman Maienschein) that amends California’s Probate Code concerning Powers of Appointment. AB 2846 affects how a Power of Appointment is created and is later exercised in California.
Powers of Appointment are sophisticated estate planning tools often used in trusts and wills. They can provide flexibility to respond to unforeseen future circumstances and they can provide significant Income Tax or Transfer Tax benefits.
Using a Power of Appointment a person can assign either a General or Limited Power over his or her own property and interests to allow another person. In addition, a person can also use a Power of Appointment to retain either a general or limited powers over his or her own property rights and interests after transferring the same, such as when assets are transferred into a trust.
Under the new law, the person receiving the grant of power will now, for the sake of clarity, be called a “Power Holder” and no longer be called a “Donee of a Power of Appointment”. The later term was sometimes confused with the person who receives property as a result of the Power Holder’s exercise of the Power of Appointment.
Under the new law, how a Power of Appointment is created is now expressly stated as follows: The person creating a Power of Appointment, who is called the “Donor”, must do so using a valid legal instrument, such as the Donor’s own will or trust. Therein, the donor must, “… 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 … .”
The same instrument must also be used to transfer the subject property to the permissible appointee. The permissible appointee is either an end beneficiary, that is, the person who comes into ownership or enjoyment of the property, or else is another power holder who receives the authority to transfer the property or its enjoyment to an end beneficiary.
Let’s consider hypothetically speaking an ongoing trust established by a parent for the benefit of his child. The trust provides for complete distribution once the child turns age twenty-five, in order to prevent the child squandering the money sooner. What would happen to the undistributed assets if the child dies before turning age twenty-five? The trust, for this reason, allows the child as Power Holder to control who receives any undistributed portion of the child’s trust inheritance. The child will exercise that power by means of his or her will or through another document.
Powers of Appointment should not be confused with “Powers of Attorney”. An Agent under Power of Attorney can exercise the rights and powers in a Fiduciary Capacity on behalf of the Principal (the person creating the Power of Attorney). That means that the Agent is acting as a legal representative (fiduciary) and not in a personal capacity. Whereas, a Power Holder is not acting as a legal representative but personally when he or she uses the Power of Appointment to transfer property or interests.
Because a Power Holder is not a legal representative (fiduciary), the assets subject to the Power of Appointment can in certain cases be subject to the claims of the Power Holder’s own creditors. If the Power Holder has a General Power of Appointment — the power to transfer property to him or herself, or his or her own estate, or to the creditors of either one — the personal creditors of the Power Holder may proceed against the Appointive Property. With a Limited Power of Appointment the opposite is typically true.
People can now use Powers of Appointment with more confidence given the clarification regarding the creation and use of Powers of Appointment, related terminology, and creditor rights in the subject property.
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