Powers of appointment

Sunday, 01 February 2009

A settlement may contain a power of appointment allowing the trustees to grant a beneficiary income or capital, with an effect similar to the exercise of a power of advancement. It may also be a useful tool for changing the beneficial entitlements to the trust property while keeping it in trust.

Powers of appointment are broadly categorised as either special or general powers of appointment and there are some interesting differences in their treatment for perpetuity purposes. (There are also hybrid powers, which do not fit neatly into either category and may be treated as general powers for some purposes and special powers for others.) The rule against perpetuities evolved over the years under the common law. Its objective is to limit the length of time in the future for which a settlor can govern the disposition of his assets. The operation of the rule can be complex, but the basic philosophy is quite simple. It seeks to allow a settlor to make gifts of assets into trust for his adult children and for his infant grandchildren (or their peers), who should take at 21, but to make it difficult to control their destination beyond this. The common law rules have for most (but not, sadly, all) purposes been replaced by the Perpetuities and Accumulations Act 1964.

General and special powers

Section 7 of the 1964 Act sets out the distinction between a general power and a special power for perpetuity purposes broadly as follows.

  • A general power of appointment is one under which there is only one donee of the power (who must be of full age and capacity when exercising the power) who can appoint the property either to himself during his lifetime; or to his estate where the power is exercised by will.

The power must be capable of being exercised without the consent of any other person or compliance with any condition. The crucial feature of a general power is that it can be exercised in favour of the donee himself. Since ‘he can first make the property his own and then give it away, and what can be done in two steps can be done in one, it should follow that he is also free to appoint to anyone else, even if not named or described as an object’ (Lewin on Trusts, Thomson Sweet & Maxwell 2008, para 30-05). A statement that the power may not be exercised in favour of a particular individual will not prevent it being a general power, provided that individual is not also the donee of the power.

  • A special power of appointment is any other power that does not fall within the definition of a general power. This would include a power to appoint to anyone in the world except the donee, or to be exercised with the consent of a particular person, or a joint power.

Powers of appointment conferred on trustees are usually special powers. It would often not be appropriate for a trustee to have a general power that would allow him to appoint to himself or anyone else. A settlor or a life tenant may have a special power of appointment under a settlement, or, less commonly, a general power of appointment. The perpetuity considerations on the exercise of a power will depend on whether it is a special power or a general power.

Exercising a general power of appointment

For perpetuity purposes, the donee of a general power is treated as the outright owner, although he is not technically the owner of the trust property. The perpetuity period for the purposes of an exercise of a general power begins with the date that the instrument of appointment takes effect and the beneficiaries of the power need only be capable of taking within the perpetuity period under that instrument.

Where the instrument exercising the power is a deed, the perpetuity period will run from the date of its execution and, if a will (or codicil), from the date of death of the testator. The power itself must become exercisable within the perpetuity period of its own governing instrument, but (except in the case of a will) will not be invalidated if actually exercised outside the period.

Exercising a special power of appointment

The property appointed by a special power must vest within the perpetuity period under the power’s own governing instrument, which starts to run from the date of its creation (or date of death if under a will trust). This is consistent with the power being exercisable only in favour of the class or specified persons chosen by the original settlor/testator. These perpetuity considerations will often frustrate the wish of a client to amalgamate a number of family settlements to reduce administration costs.

Inheritance tax treatment

This deeming (for perpetuity purposes) of a general power as tantamount to an outright interest, is not carried over into the inheritance tax legislation where the property in question is settled. This means that where a donee has a general power of appointment over settled property, it will not be treated as part of his estate (section 5(2) Inheritance Tax Act 1984).

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Amanda Edwards

Amanda Edwards TEP is a Solicitor with Boodle Hatfield.

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