spotlight on: Powers of Appointment

Part of the process of preparing your estate plan is becoming familiar with the nature of your assets.  As we tell clients – we do not need exact values but we need enough information to determine whether estate tax is an issue, for example.  Sometimes a client will tell us that they are a beneficiary of another person’s trust.

Let’s imagine Elizabeth comes to see us and informs us that she is a beneficiary of her late father George’s trust.  The trust holds certain real property and the rental income gets distributed out to Elizabeth and her sister Margaret for life.  Can Elizabeth pass this benefit on to her beneficiaries if something happens to her during the term of George’s trust?  The answer is always twofold: maybe; we need to see George’s trust.

It may not be sufficient for Elizabeth to assign her interest in her father’s trust, to her own trust.  One can assign many things to a trust, for example personal property or business interests, and we have a particular form by which we do this.  However where a beneficial interest in a trust is concerned, it is necessary to dig deeper.  We will review the language in George’s trust to determine what happens to Elizabeth’s interest upon her demise.  It may say that her interest lapses, or goes to her descendants, or goes to Margaret.  Alternatively, it might grant Elizabeth a lifetime “power of appointment” by which she can appoint (designate) beneficiaries of her share.

There are different types of powers of appointment – some broad, some limited – and they can be employed to confer certain tax advantages on the powerholder.  Most importantly for Elizabeth’s purposes is that it gives her the power to direct the disposition of an irrevocable trust!  Perhaps the default language of George’s trust provides that if Elizabeth dies, her share passes to her children.  But perhaps Elizabeth feels her children have ample resources and would rather the funds benefit a Corgi rescue organization.  The key is to exercise the power of appointment in precisely the way George’s trust requires and in conformity with California law.

Probate Court may be a court of equity, but California courts have enforced this area of the law strictly.  Some say this is to prevent the accidental exercise of powers of appointment.  Attention to detail and big picture thinking are both critically important in the estate planning context.  If you are a beneficiary of a trust and want to know how that ties into your own estate plan, remember powers of appointment and contact your estate and trust attorney for help.

Here is a predicament we see from time to time in our practice.  Elizabeth creates a revocable living trust and intends to fund it with her real property, bank accounts, brokerage accounts and other assets.  All of these assets are listed on a schedule at the back of Elizabeth’s trust.  Elizabeth also executes a general assignment, which assigns all of her property to the trust, and a pour-over will, which devises all of her assets to the trust.  Elizabeth is the sole trustee and beneficiary during her lifetime and upon death her sister Margaret steps in as trustee to administer the trust for the benefit of Elizabeth’s beneficiaries.

Margaret discovers that somehow one of the assets slipped through the cracks – maybe Elizabeth neglected to transfer it to her trust or maybe the financial institution neglected to change title to the account despite Elizabeth’s instructions.  Let’s assume it is brokerage account valued at $500,000 when Elizabeth dies.  If a person dies in California owning more than $166,250 in her individual name, a probate may be required.  Assets in a trust are of course not subject to probate.  A probate of an estate valued at $500,000 would incur $26,000 in attorney’s fees and executor’s fees, not including costs, and could take upwards of a year to conclude.

I say “may be required” because there are sometimes alternatives to a full probate.  In this case we would absolutely advise the trustee to go the way of a Heggstad petition.  This is a petition brought under California Probate Code § 850, colloquially named after the 1993 appellate decision, Estate of Heggstad.  Probate Code § 850 is a powerful tool and one of the situations it addresses is where “the trustee has a claim to the real or personal properly, title to or possession of which is held by another.”  Here Margaret as trustee has a claim to the brokerage account titled in Elizabeth’s name.

A Heggstad petition is premised on the fact that the decedent intended to include all her assets in the trust.  Here we have good evidence of Elizabeth’s intent – the brokerage account is identified on the schedule of assets, is generally referenced by the assignment, and would be distributed to the trust in a probate of the pour-over will.  No one element such as identification on the schedule of assets is necessary or sufficient; a court will look at the totality of elements present.

As with any petition involving a trust, the Heggstad petition requires 30 days’ notice be given to trust beneficiaries and legal heirs, after which there will be a hearing.  If our petition is well-supported by evidence of Elizabeth’s intent and there is no formal opposition, I would anticipate court approval at that first hearing.  With the order in hand confirming the brokerage account is part of the trust, the trustee can marshal that asset and proceed with the trust administration.  Margaret will have saved the trust and its beneficiaries significant time and expense, and upheld Elizabeth’s intent.