The grant of a power of appointment to a trust beneficiary offers flexibility in an estate plan that’s virtually impossible to achieve any other way. For example, arming a beneficiary with a testamentary power of appointment allows that beneficiary to custom tailor what the next generation receives (if anything), based on the facts as they exist years (or decades) after the trust agreement was first executed. That’s what was supposed to happen in the linked-to case above, in which three trusts were created in 1970, all of which contained testamentary powers of appointment exercisable by the settlor’s daughter (Sally Christiansen), all of which became effective 41 years later when Sally died in 2011. Here’s how the power of appointment was stated by Sally’s father:
Upon the death of my daughter, SALLY, the Trustees shall transfer and deliver the remaining principal of this share of the trust, together with any accumulated or undistributed income thereon to or for the benefit of such one or more persons, corporations or other organizations, in such amounts and subject to such trusts, terms and conditions as my daughter may, by her will, appoint, making specific reference to the power herein granted. ….
Something must have happened in the 41 years between 1970 and 2011, because Sally apparently intended to exercise her power of appointment in a way that disinherited her surviving children (the default beneficiaries under her father’s trust). Unfortunately for Sally, the lawyer she hired to draft her will didn’t take the time to read her father’s trust. According to the 1st DCA:
[T]he [drafting] attorney testified that he made no effort to ensure that [Sally’s] will complied with the trusts’ requirements when preparing the decedent’s final will in 2009 even though he had previously been provided a copy of at least one of the trusts.
Not having read the trust, it’s no surprise the lawyer hired to draft Sally’s will left out the following key text: a clause making specific reference to the trust’s power of appointment. Oops! Instead, the only reference in Sally’s will to her father’s trusts was the following single sentence:
Included in my estate assets are the STANTON P. KETTLER TRUST, FBO, SALLY CHRISTIANSEN, under will dated July 30, 1970, currently held at the Morgan Stanley Trust offices in Scottsdale, Arizona, and two (2) currently being held at Northern Trust of Florida in Miami, Florida.
Can the “equitable exception” doctrine salvage a will’s non-existent exercise of a power of appointment? NO
Powers of appointment have been around for a long time, so Sally wasn’t the first person to sign a will that managed to muck up the mechanics of this simple — but powerful — estate planning tool. Rather than hammer family members (and other favored classes of beneficiaries) for these drafting mistakes, the English courts of Chancery developed the “equitable exception” doctrine, which salvages bad drafting as long as the defective will is arguably somewhere close to the mark. The doctrine’s been applied in the U.S. (but not Florida), and is articulated in Restatement (First) of Property § 347 as follows:
Failure of an appointment to satisfy formal requirements imposed by the donor does not cause the appointment to be ineffective in equity if (a) the appointment approximates the manner of appointment prescribed by the donor; and (b) the appointee is a wife, child, adopted child or creditor of the donee, or a charity, or a person who has paid value for the appointment.
At issue in this case was whether Sally’s will was close enough to qualify for the equitable exception doctrine. Answer: NO. Why? Bad drafting’s forgivable, but a blank slate isn’t. In other words, Sally’s intent to exercise the power of appointment had to be reflected somewhere within the four corners of her will, because her will failed to include any reference to the power whatsoever, it fails . . . no matter how strong the extrinsic evidence of her contrary testamentary intent might be. Here’s how the 1st DCA explained this point, relying heavily on a similar 1986 case out of Arizona:
[I]n In re Strobel, 149 Ariz. 213, 717 P.2d 892, 893–94 (1986), Mr. Strobel created two trusts, each of which gave Mrs. Strobel a power of appointment which required specific reference in her will. Mrs. Strobel’s will stated that she had been given a power of appointment in Mr. Strobel’s will rather than the trust documents and that, pursuant to such power, she appointed all of the trust assets to her estate. Id.
The Strobel court noted that the general rule is that an exercise of a power of appointment must comply with the specific requirements imposed by the donor. Id. at 896–97. However, the court adopted the view of the Restatement of Property § 34 (1940) that “equity will ‘aid the defective execution of a power’ ” if the defect was due to mistake, the appointment approximately met the requirements of the manner of exercise, and the appointee was a natural object of affection. Id. The court concluded that the evidence showed that Mrs. Strobel clearly intended to exercise the power of appointment and that the invalidity of her exercise of the power was due to mistake. Id. at 897. The court then, after concluding that granting equitable relief would not defeat Mr. Strobel’s purpose in imposing the requirements on exercising the power of appointment, gave effect to the defective exercise of appointment in light of Mrs. Strobel’s approximate compliance with the requirements. Id. at 899.
Here . . . the decedent’s will did not include even a general reference to the powers of appointment held by the decedent. Without such, the decedent’s will failed to even substantially comply with the “specific reference” requirements of the trusts. The Strobel court made this precise point when it noted:
[T]he donee’s intent to exercise the power of appointment must be evident from the document itself. Thus, for example, if the donee’s will makes “no reference at all to any power,” and the donor required “specific reference to the power,” the will cannot exercise the power of appointment, even under the equitable exception. Furthermore, “no amount of intent by the donee will exercise a power in the face of a contrary intent by the donor.”
Id. at 897 (citations omitted and emphasis in original).
What about Fla. Stat. § 732.607? Can it save the day? NO
Having struck out under the equitable exception doctrine, Sally’s personal representative pointed to Fla. Stat. § 732.607, our probate code section dealing with powers of appointment, and again tried to argue the will’s exercise of the power of appointment should be given effect based on extrinsic evidence of Sally’s intent. Fla. Stat. § 732.607 provides as follows:
A general residuary clause in a will, or a will making general disposition of all the testator’s property, does not exercise a power of appointment held by the testator unless specific reference is made to the power or there is some other indication of intent to include the property subject to the power.
Noting this same argument was tried — and rejected — in Talcott v. Talcott, 423 So.2d 951 (Fla. 3d DCA 1982), the 1st DCA again said no. It’s the settlor’s intent that matters, not Sally’s. Here’s how the 1st DCA summed up it’s thinking on this point and the case as a whole:
The Talcott court rejected an identical argument as to the applicability of section 732.607 when, citing the statute, the court stated, “[i]f the trust contains no specific limitation on the manner of executing the power, other evidence that the power had been executed may be considered to determine intent [but][w]hen the trust defines the manner in which the power must be exercised, noncompliance with the donor’s requirements defeats the appointment.” 423 So.2d at 955–56 (citations omitted). We agree; nothing in section 732.607 limits the power of an individual to place specific requirements on the disposition of his or her property and where, as here, a settlor of a trust places specific restrictions on the exercise of a power of appointment, section 732.607 is inapplicable.
In sum, we conclude that to properly exercise a power of appointment such as the powers provided for in the trusts at issue in this case, the decedent must at least make reference in his or her will to the powers of appointment held by the decedent. Here, the mere reference to one of the trusts and to the location of the property of the other two trusts was not sufficient to even substantially comply with the “specific reference” requirements in the trusts. Accordingly, because the decedent failed to comply with the requirements of the trusts when attempting to execute her powers of appointment, the assets in the trusts did not become part of her estate and must pass to the decedent’s children, as directed in the original trusts, rather than to Ms. Cessac as provided in the decedent’s will.