Power of appointment legislation in New York: it's time for modernization.

• Author: Bloom, Ira Mark
• Position: Introduction through V. Creation Issues, p.9-49

1. INTRODUCTION

   Power of appointment legislation has existed in New York since 1830. (1) Indeed, the 1830 legislation remained largely intact until 1964 when the legislature effectively repealed existing power of appointment legislation that was contained in Article 5 of the Real Property Law (2) and replaced it with a new Article 5. (3) In turn, new Article 5 was essentially reenacted under Article 10 of the New York Estates, Powers & Trusts Law ("EPTL") effective on September 1, 1967. (4) With few exceptions, current New York power of appointment legislation has remained unchanged since 1967. (5)

   Although New York power of appointment legislation has remained largely static for almost fifty years, major developments in the area have occurred. Two significant developments were made under the Second and Third Restatements of Property. Published in 1986 as an entire volume of the Restatement (Second) of Property, (6) the power of appointment division effectively updates the treatment of powers of appointment that is found in the First Restatement. (7) A significantly updated treatment of powers of appointment, running over two hundred pages, is found in the Restatement (Third) of Property: Wills and Other Donative Transfers, which was published in 2011. (8)

   There is another important and very recent national development in the power of appointment area. A draft Uniform Powers of Appointment Act ("Draft UPOA") is in progress, (9) which is effectively based on translating the power of appointment provisions in the Restatement (Third) of Property into statutes. (10)

   The purpose for this article is to recommend updated power of appointment legislation for New York. (11) Specifically, I will recommend specific statutory treatment for important substantive aspects in the power of appointment area. (12) The Restatement provisions as well as their translation into statutes by the Draft UPOA (13) will frequently provide the basis for my recommended statutes.

   Before addressing how New York law should be changed, a few preliminaries are in order. First, Part II provides a brief explanation of powers of appointment, as many readers may not be familiar with this fairly arcane, but important, topic. (14) Next, Part III briefly considers the historical development of power of appointment legislation in New York. (15)

   Parts IV-VII recommend specific power of appointment statutes for New York in four major areas: general provisions, creation, exercise, and creditors' rights. (16) Part IV involves general provisions, including definitions. (17) Part V focuses on the creation of powers of appointment. (18) Part VI recommends statutes involving the exercise of powers of appointment (19) while Part VII addresses the importance of creditors' right. (20)

   Parts IV-VII are structured similarly. First, I provide the current New York law on the particular issue; in most cases this will be by reference to existing New York statutes. (21) Next the applicable Restatement provision or provisions are identified. I then set forth my recommended statute for the issue. Finally, I include a discussion which explains my recommendation. (22)

2. A PRIMER ON THE POWER OF APPOINTMENT DEVICE

   The late Barton Leach of Harvard Law School began his 1938 law journal article as follows: "The power of appointment is the most efficient dispositive device that the ingenuity of Anglo-American lawyers has ever worked out." (23) Before noting the historical development of the power of appointment device and thereafter explaining its important function in the contemporary estate planning world, a working definition for a power of appointment will be useful. (24) Consider my formulation in 1981: "In essence, a power [of appointment] is a right given by the owner of property (donor) to an individual (donee) to determine which party shall enjoy an interest in property ([permissible] appointee or taker in default)." (25) In effect, the donee of a power of appointment gets to choose who will receive an interest in the donor's former property; the choice is between the persons who the donor specifies as permissible recipients (permissible appointees), (26) and those who would take if the power is not exercised (takers in default). (27)

   The power of appointment device has been around for centuries. It was used to circumvent England's prohibition on transferring land restrictions by will, which endured until the Statute of Wills was enacted in 1540. (28) Although the device was used in America before the twentieth century, (29) its use became more widespread with the advent of federal estate, gift, and income taxation in the early part of the twentieth century. (30) Indeed, in 1986, the Restatement (Second) of Property explained the tax minimizing opportunities afforded by the power of appointment device:

   Powers of appointment have been extensively employed in various kinds of estate plans in the hope that the powerholder will have many of the benefits of ownership of the property subject to the power without the income, gift, and estate tax burdens that accompany outright ownership. (31) Today the power of appointment device is a staple in the estate planner's arsenal because both significant nontax and tax advantages can be obtained by its use. (32) Consider how the power of appointment device can be used by contemporary estate planners to achieve important nontax dispositive goals for their clients: flexibility, control, and creditor protection. Client wants to create a testamentary trust for Client's Child for life, with the trust property passing to Client's Grandchildren on trust termination. Client does not like the rigidity of fixed remainders that would result if the remainder was simply left to Client's Grandchildren. (33) Rather, Client wants Client's Child to decide up until death how the trust principal will be enjoyed by Client's Grandchildren. (34)

   One solution is for Client (donor) to give Child (donee) a testamentary power of appointment pursuant to which Child will name in Child's will who among the Grandchildren (permissible appointees) will take and in what proportions. (35) In this way, the trust remains flexible until Child dies, gives Child control over the principal, (36) and the principal is not subject to reach by Child's creditors. (37)

   Tax advantages will also be obtained. The trust principal will not be subject to federal (or New York) estate taxation on Child's death, (38) Nor will federal (or New York) estate generation-skipping transfer tax be imposed on the trust principal when Child dies if the transfer falls under the federal generation-skipping transfer tax exemption. (39)

3. A BRIEF HISTORY OF NEW YORK POWER OF APPOINTMENT LEGISLATION

   Prior to the Revised Statutes of 1830, the law of powers in New York was based on English common law. (40) Declaring English common law to be essentially an abomination, (41) the Revisers determined to jettison the common law of powers in favor of statutory power law. The result was the enactment of the third Article of the Revised Statutes of 1830. (42) The first section of Article Third (Of Powers) provided as follows:

   [section] 73. Powers, as they now exist by law, are abolished; and from the time this Chapter shall be in force, the creation, construction and execution of powers, shall be governed by the provisions of this Article. (43) Section 74 made clear that Article (Third) only applied to real property:

   A power is an authority to do some act in relation to lands, or the creation of estates therein, or of charges thereon, which the owner granting or reserving such power, might himself lawfully perform. (44) Sections 75-135 of Article (Third) ensued. Interestingly, however, none of the statutes under Article Third specifically referred to power of appointment; reference was only to "power" in the statutes. Nonetheless several sections had direct application to powers of appointment. (45)

   Subsequent to 1830, legislative enactments resulted in mostly cosmetic changes to the statutes that were originally enacted under the Revised Statutes of 1830. (46) The major cosmetic change was to renumber the original sections as part of powers legislation under New York's Real Property Law. For example, legislation in 1896 included a powers article under Article 4 of the Real Property Law of 1896. (47) Legislation in 1909 enacted powers legislation under Article 5 of the Real Property Law article. (48)

   Strikingly, the 1909 legislation on powers, which in substance reflected the substance of the powers article that was enacted by the Revised Statutes of 1830, (49) remained virtually intact until June 1, 1965. (50) Significant changes to Article 5 of the Real Property Law became effective on June 1, 1965 as a result of 1964 legislation. (51) In turn, Article 5 of the Real Property Law was enacted without significant change as Article 10 of the EPTL, which became effective on September 1, 1967. (520 Apart from a few amendments, Article 10 remains unchanged since 1967. (53)

   The circumstances behind enactment of the EPTL, including Article 10 (Powers), bear discussion. In 1961, the legislature created the Temporary State Commission on the Modernization, Revision and Simplification of the Law of Estates to the Governor and the Legislature. (54) The Commission, which was chaired by Nassau County Surrogate John D. Bennett, came to be known as the Bennett Commission.

   The enabling legislation for the Bennett Commission stated as follows:

   The commission shall make a comprehensive study of the relevant provisions of the real property law, the personal property law, the decedent estate law, the surrogates court act and such other statutes as the commission may deem advisable for the purpose of correcting any defects that may appear in the laws relating to estates and their administration, the descent and distribution of property, and the practice and procedure relating thereto, and for the purpose of...