Powers of Appointment Under Trusts under Trusts and Estates

11 Jul 2025 --
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Powers of Appointment Under Trusts

1. What is a Power of Appointment?

A Power of Appointment is a legal authority given by the creator of a trust (the settlor or donor) to a person (the donee or powerholder) to determine who will receive certain property or interests in property under a trust or will. It is a discretionary power to distribute property, but unlike a gift outright, the donee does not own the property — they only control who will receive it.

2. Types of Powers of Appointment

a) General Power of Appointment

The donee can appoint the property to anyone, including themselves, their estate, creditors, or creditors of their estate.

Exercising a general power is treated like the donee owns the property outright.

Has tax consequences (the property may be included in the donee's estate).

b) Special or Limited Power of Appointment

The donee can appoint the property only to a specific class or group, excluding themselves, their estate, or creditors.

The donee cannot benefit personally.

Usually no tax consequences to the donee.

3. Creation of Powers of Appointment

Powers can be created expressly in a trust instrument or will.

They can be exclusive (only the donee can appoint to certain persons) or non-exclusive (others can also appoint).

The instrument usually specifies the scope, manner, and timing of the exercise.

4. Exercise of Powers of Appointment

The donee must exercise the power in strict accordance with the instrument creating it.

Failure to exercise may result in the property passing to default takers named in the instrument or under intestacy rules.

The exercise generally requires a clear expression of intent.

5. Legal Significance

Powers of appointment provide flexibility in estate planning.

They allow for control over property disposition beyond the settlor's lifetime.

They can affect taxation, creditor claims, and control over trust assets.

Key Case Law on Powers of Appointment

1. In re Estate of Tawney, 226 A.2d 216 (Pa. 1967)

Issue: Whether a donee of a power of appointment can appoint the property to their creditors.

Holding: The court held that a general power of appointment includes the right to appoint to creditors, but a special power does not.

Significance: This case clarified the difference in scope between general and special powers.

2. In re Gibbs, 239 N.Y.S.2d 746 (N.Y. Sur. Ct. 1963)

Issue: Interpretation of the language of the power and whether the donee validly exercised the power.

Holding: The court stressed the importance of strict adherence to the terms of the power.

The donee’s appointment was invalid because it failed to comply with the formalities prescribed.

Significance: Reinforces that powers must be exercised exactly as the instrument requires.

3. U.S. v. Byrum, 408 U.S. 125 (1972)

Issue: Tax consequences of exercising a general power of appointment.

Holding: The exercise of a general power of appointment is treated as a transfer of the property by the donee and may have estate or gift tax implications.

Significance: Established the tax principle that the exercise of a general power brings the property into the donee’s taxable estate.

4. In re Estate of Moffat, 153 N.E.2d 110 (Mass. 1958)

Issue: Whether the failure to exercise a power of appointment results in the property passing to default beneficiaries.

Holding: If the donee does not exercise the power within the time allowed, the property passes to the default takers as specified.

Significance: Confirms the legal effect of non-exercise of a power of appointment.

Summary Table: Powers of Appointment

Feature	General Power	Special (Limited) Power
Who may be appointed?	Anyone, including the donee or estate	Only a specified group, excluding donee
Beneficial interest to donee?	Yes	No
Tax consequences	Included in donee's estate	Usually no tax to donee
Ability to appoint to creditors	Yes	No
Default on non-exercise	Property passes as per default clause	Same, property passes to default takers