UNIFORM POWERS OF APPOINTMENT ACT - PowerPoint Presentation

UNIFORM POWERS OF APPOINTMENT ACTChicago Estate Planning Council WebinarNovember 7, 2018Susan D. SnyderKathleen E. Buchar

UNIFORM POWERS OF APPOINTMENT ACT (“UPOA Act”)Importance of powers of appointmentUPOA created in 2013 and has been adopted by eight states other than Illinois.Illinois House Bill 4702 – creates new 760 ILCS §105 et. seq. Takes effect in Illinois on January 1, 2019

Definitions (§102)“Power of Appointment” means a power that: Enables a “powerholder”,Acting in a non-fiduciary capacity,To designate a recipient of,An ownership interest in, or another power of appointment over, “Appointive property”.

Parties and Elements Involved (§102 cont’d) “Donor” “Powerholder ” “Appointee” “Permissible appointee” “Impermissible appointee ” “Appointive property” “Instrument” “Terms of the Instrument” “Taker in Default of Appointment”

Types of POAs (§102 cont’d)“ Exclusionary Power of Appointment” “General Power of Appointment” “Nongeneral Power of Appointment” When POA May Be Exercised (§102 cont’d)“Presently Exercisable POA” A “Postponed Power” or “Deferred Power” “ Testamentary POA”

Types of Clauses Involved in Exercising a POA (§102 cont’d) “Specific-Exercise Clause”“Blanket-Exercise Clause” “Blending Clause” “Gift-in-Default Clause”

Governing Law (§103)Unless the terms of the instrument creating the POA manifest a contrary intent:The law of the donor’s domicile at the relevant time governs the actions of the donorThe law of the powerholder’s domicile at the relevant time governs the powerholder’s actions Common Law (§104)

UPOA – CREATION , REVOCATION, AND AMENDMENT OF A POA (ARTICLE 2) Properly executed instrumentRequires a transfer of propertyManifest the donor’s intent to create, in a powerholder, a POA over the appointment property, exercisable in favor of a permissible appointeeCannot be created in a deceased person Can be created in an unborn or unascertained individual Valid Instrument and Parties (§201)

Nontransferability (§202) Presumption of Unlimited Authority (§203) “ Presently Exercisable” “Exclusionary” A “general” POA

Exception to Presumption ofUnlimited Authority (§204) Unless the instrument creating the POA expresses a contrary intent, a POA is nongeneral if:It is exercisable only at the powerholder’s death, and 2. The permissible appointees are a defined and limited class that does not include the powerholder’s estate, creditors, or the creditors of the powerholder’s estate.

Rules of Classification (§205) If a powerholder may exercise a POA only with the consent or joinder of an adverse party, the power is nongeneral.If the permissible appointees are not “defined and limited”, the power is exclusionary. Power to Revoke or Amend (§206) A donor may revoke or amend a POA only if:The instrument creating the POA is revocable by the donor, OR The donor reserves a power of revocation or amendment in the instrument creating the POA .

UPOA – EXERCISE OF POWER OF APPOINTMENT (ARTICLE 3)Requisites for Exercise of POA (§301) The instrument exercising the POA must be valid under applicable law. The terms of the instrument must manifest the powerholder’s intent to exercise the POA, and substantially comply with the requirements of exercise, any, imposed by the donor. The appointment must be a permissible exercise of the POA.

Intent to Exercise: Determining Intent from Residuary Clause (§302) A residuary clause manifests the powerholder’s intent to exercise a POA only if:Nothing else in the instrument containing the residuary clause manifests a contrary intent; Power is a general POA exercisable in favor of the powerholder’s estate;There is no gift-in-default clause for the POA, and The powerholder did not release the POA.

Intent to Exercise: After-Acquired Power (§303) Unless the terms of the instrument exercising the POA manifest a contrary intent:A blanket-exercise clause extends to a POA acquired by the powerholder after executing the instrument containing the clause; If the powerholder is also the donor of the POA, the blanket-exercise clause does not extend to the POA unless there is no gift-in -default clause

Substantial Compliance with Donor-Imposed Formal Requirement (§304)A powerholder’s substantial compliance with a formal requirement of appointment imposed by the donor, is sufficient if:The powerholder knows of and intends to exercise the POA; The powerholder’s manner of attempted exercise does not impair a material purpose of the donor in imposing the requirement.

Permissible Appointment (§305)A general POA exercisable in favor of the powerholder or the powerholder’s estate may be appointed by the powerholder in any way, including in trust or creating a new POA. A general POA exercisable in favor of only the creditors of the powerholder or of the powerholder’s estate is restricted to appointing to those creditors.

(Permissible Appointment (§305 cont’d)) Unless the terms of the instrument creating a POA manifest a contrary intent, a powerholder may exercise a nongeneral POA:In any form, with any conditions and limitations, including in trust, in favor of a permissible appointee; To create a general or nongeneral POA in a permissible appointee that may be exercised in favor of persons other than the permissible appointees of the original nongeneral POA; To create a nongeneral POA in any person to appoint to one or more of the permissible appointees of the original nongeneral power.

Appointment to Deceased Appointee or Permissible Appointee’s Descendant (§306)An appointment to a deceased appointee is ineffective.Impermissible Appointment (§307) An exercise of a POA in favor of an impermissible appointee is ineffective.An exercise of a POA in favor of a permissible appointee is ineffective to the extent the appointment is a fraud on the power.

Selective Allocation Doctrine (§308) If a powerholder exercises a POA in a disposition that also disposes of property the powerholder owns, the owned property and the appointive property must be allocated in the permissible manner that best carries out the powerholder’s intent.

Capture Doctrine: Disposition of Ineffectively Appointed Property Under General Power (§309) The gift-in-default clause controls the disposition of the ineffectively appointed property, orIf there is no gift-in-default clause or to the extent the clause is ineffective, the ineffectively appointed property passes to:The powerholder, if the powerholder is a permissible appointee and is living; orTo the powerholder’s estate, or passes under a reversionary interest to the donor or the donor’s transferee or successor in interest.

Disposition of Unappointed Property Under Released or Unexercised General Power (§310)The gift-in-default clause controls.If there is no gift-in-default clause: Except as otherwise provided in (b), the unappointed property passes to:The powerholder, if the powerholder is a permissible appointee and living; orThe powerholder’s estate if the estate is a permissible appointee; orThe unappointed property passes under a reversionary interest to the donor or the donor’s transferee or successor in interest.

Disposition of Unappointed Property Under Released or Unexercised Nongeneral Power (§311) The gift-in-default clause controls.If there is no gift-in-default clause, the unappointed property: Passes to the permissible appointees if:They are defined and limited; andThe terms of the instrument creating the power do not manifest a contrary intent ; or Passes under a reversionary interest to the donor or the donor’s transferee or successor in interest.

Disposition of Unappointed Property If Partial Appointment to Taker In Default (§312). 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.The assumption is that the taker in default can take in both capacities.

Appointment to Taker in Default (§313)If appointee would have taken the property anyway under a gift-in-default clause, the POA is deemed not to have been exercised and the appointee takes under the gift-in-default clause.If appointee receives a different interest than what appointee would have received as a taker in default (e.g. property in trust instead of outright), or if exceeds the total amount the appointee would receive as a taker in default, then the exercise of the POA is treated as effective.

Powerholder’s Authority to Revoke or Amend Exercise (§314)A powerholder may revoke or amend an exercise of a POA only to the extent that:Powerholder has reserved a power of revocation or amendment and, if the POA is nongeneral, the terms of the instrument creating the POA do not prohibit the reservation; orThe terms of the instrument creating the POA provide that the exercise is revocable or amendable.

Disposition of Trust Property Subject to Power (§315)In disposing of trust property subject to a POA exercisable by an instrument other than a will, a trustee acting in good faith shall have no liability for relying upon an instrument believed to be genuine purporting to exercise a POA, or for assuming that there is no instrument exercising the POA in the absence of actual knowledge thereof within 3 months of the last date on which the POA may be exercised. Illinois specific language; not part of the Uniform Powers of Appointment Act.Added to incorporate current Illinois law regarding non-testamentary POAs (765 ILCS 320/1(c)).Does not address POAs exercisable by Will.

UPOA – DISCLAIMER OR RELEASE; CONTRACT TO APPOINT OR NOT TO APPOINT (ARTICLE 4)Disclaimer (§ 401)As provided by Section 2-7 of the Probate Act of 1975:A powerholder may disclaim all or part of a POA.A permissible appointee, appointee, or taker in default of appointment may disclaim all or part of an interest in appointive property. Authority to Release (§402)A powerholder may release a POA, in whole or in part, except to the extent the terms of the instrument creating the power prevent the release.

Method of Release (§403)A powerholder may release the POA in whole or in part:By substantial compliance with a method provided in the terms of the instrument creating the power; or By an instrument manifesting the powerholder’s intent by clear and convincing evidence.Revocation or Amendment of Release (§404)A powerholder may revoke or amend a release of a POA only to the extent that: The instrument of release is revocable by the powerholder; orThe powerholder reserves a power of revocation or amendment in the instrument of release.

Power to Contract: Presently Exercisable Power of Appointment (§405)A powerholder of a presently exercisable POA may contract:Not to exercise the power; orTo exercise the power if the contract when made does not confer a benefit on an impermissible appointeePower to Contract: Power of Appointment Not Presently Exercisable (§406 )A powerholder of a POA that is not presently exercisable may contract to exercise or not to exercise the POA only if the powerholder:Is also the donor of the power; andHas reserved the power in a revocable trust.

Remedy for Breach of Contract to Appoint or Not to Appoint (§407)The remedy for a powerholder’s breach of a contract to appoint or not to appoint is limited to damages payable out of the appointive property or, if appropriate, specific performance of the contract.Powerholder’s owned assets are not available to satisfy damages.

RIGHTS OF POWERHOLDER’S CREDITORS IN APPOINTIVE PROPERTY (ARTICLE 5)Creditor Claim; General Power Createdby Powerholder (§ 501)Includes any appointive property subject to general POA created by someone else, to extent powerholder contributed property.Appointive property is subject to a claim of a creditor of the powerholder or of the powerholder’s estate to the extent provided in the Uniform Fraudulent Transfer Act.Subject to (b), appointive property is not subject to a claim of a creditor of the powerholder or the powerholder’s estate to the extent POA was already irrevocably exercised in favor of a person other than the powerholder or the powerholder’s estate.

Creditor Claim; General Power Created by Powerholder (§501) (cont’d)Subject to (b) and (c), and notwithstanding a spendthrift provision or whether the claim arose before or after the creation of the POA, appointive property subject to a general POA created by the powerholder is subject to a claim of a creditor of: The powerholder, if the power is presently exercisable;The powerholder’s estate, to the extent the estate is insufficient to satisfy the claim, and subject to the right of a decedent to direct the source from which liabilities are paid, if the POA is exercisable at the powerholder’s death.

Creditor Claim: General Power Not Created by Powerholder (§502) Except as otherwise provided in (b), appointive property subject to a general POA not created by the powerholder is subject to a claim of a creditor of:The powerholder, to the extent the powerholder’s property is insufficient, if the POA is presently exercisable; and The powerholder’s estate if the POA is exercised at the powerholder’s death, to the extent the estate is insufficient, subject to the right of the deceased powerholder to direct the source from which liabilities are paid. Subject to §504(c), a POA not created by the powerholder which is subject to an ascertainable standard relating to an individual’s health, education, support, or maintenance within the meaning of 26 U.S.C §2041(b)(1)(A) or §2514(c)(1), as amended, is treated for purposes of this Article as a nongeneral power.

Power to Withdraw (§503)For purposes of this Article, and except as otherwise provided in (b), a power to withdraw property from a trust is treated as a presently exercisable general POA to the extent of the property subject to the power to withdraw. A power to withdraw property from a trust ceases to be treated as a presently exercisable general POA upon its lapse, release, or waiver.

Creditor claim: Nongeneral Power (§504)Except as otherwise provided in (b) and (c), appointive property subject to a nongeneral POA is exempt from a claim of a creditor of the powerholder or the powerholder's estate.Appointive property subject to a nongeneral power of appointment is subject to a claim of a creditor of the powerholder or the powerholder's estate to the extent that the powerholder owned the property and, reserving the nongeneral power, transferred the property in violation of the Uniform Fraudulent Transfer Act. If the initial gift in default of appointment is to the powerholder or the powerholder's estate, a nongeneral power of appointment is treated for purposes of this Section as a general power.

Miscellaneous Provisions (Article 6)Uniformity of Application and Construction (§601) In applying and construing this uniform Act, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.Application to existing relationships (§603)Except as otherwise provided in this Act: This Act applies to a POA created before, on, or after its effective date;This Act applies to a judicial proceeding concerning a POA commenced on or after its effective date; This Act applies to a judicial proceeding concerning a POA commenced before its effective date, unless the court finds that application of a particular provision of this Act would substantially interfere with the effective conduct of the judicial proceeding or prejudice a right of a party;

Application to existing relationships (§603) (cont’d)A rule of construction or presumption provided in this Act applies to an instrument executed before the effective date of the Act unless there is a clear indication of a contrary intent in the terms of the instrument; and An act done before the effective date of this Act is not affected by this Act.If a right is acquired, extinguished, or barred on the expiration of a prescribed period that commenced under law of this State other than this Act before the effective date of this Act, the law continues to apply to the right. No trustee is liable to any person in whose favor a POA may have been exercised for any distribution of property made to persons entitled to take in default of the effective exercise of the POA to the extent that the distribution shall have been completed prior to the effective date of this Act.

OTHER CHANGES TO ILLINOIS LAWThe Illinois Disclaimer statute (755 ILCS 5/2-7) is revised to add language providing that “a powerholder, as that term is defined in Section 102 of the Uniform Powers of Appointment Act, with respect to property shall be deemed to be a holder of an interest in such property”. The Testamentary Powers of Appointment statute (755 ILCS 5/4-2) is repealed.The Power of Appointment Exercise Act 765 ILCS 320 et. seq.) is repealed. The Termination of Powers Act (765 ILCS 325 et. seq.) is repealed.

AVOIDING MISTAKES IN CREATING POASSpecify if POA is general or nongeneral (identify permissible appointees)Consider tax consequencesSpecify what state law governs?Valid instrument creating the POAInclude an effective gift-in-default clause

AVOIDING MISTAKES IN EXERCISING POASUse “specific exercise” clause to refer to the POA and details of how the property is to be appointedConsider using a “nonexercise” clauseComply with any formalities imposed by the donor in exercising the POAValid instrument exercising the POA

COMMON PROBLEMSAppointive property directed to be added to the powerholder’s revocable trustAppointment to impermissible appointeesCheck definitions of “descendant”, “issue” Check all potential beneficiaries under exercise of POA, including any “catastrophe” provision

COMMON PROBLEMS (cont’d)Exercise exceeds the scope of the POA POA limited to a percentage of trust assetsPOA limited to changing only the method in which beneficiary receives assets POA may limit what specific appointee may receive (e.g. spouse may only receive an income interest)Exercise violates the rule against perpetuities.

Copyright © 2018 Northern Trust Corporation. All rights reserved.This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.This material is for information purposes only. The views expressed are those of the authors as of the date noted and not necessarily of Northern Trust or its affiliates and are subject to change based on market or other conditions without notice.

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