Whether an Equitable Power of Appointment Existing in a Trust is “Gross” or “Incidental”: The Practical Implications | Charles E. Rounds, Jr. – Suffolk University Law School

Section 17.3, comment f, of the Restatement (Third Party) of Property (Wills and Other Gift Transfers) explains the difference between a collateral and gross power of attorney: “In traditional terminology, a power of attorney is ‘collateral’ when the donee does not have an ownership interest in the assets being gifted. A power of attorney is ‘gross’ when the donee has an ownership interest in the assets being gifted that is separate from his power of attorney, such as when the income beneficiary of a trust has power of attorney over the remainder interest.” So far, so good, although the term remainder is not quite correct in this context. Since a future equity interest under a trust is not supported by a prior estate because the legal title rests with the trustee, it is analogous to refer to such an interest as a remainder. But the commentary ends with a claim that is neither explained in the reporter’s notes nor supported by any supporting authority: “The terms ‘collateral power’ and ‘power of attorney’ are merely descriptive and have no legal consequences.” There is a 1990 case involving an English pension fund in chancery proceedings where the judge said pretty much the same thing. He described the dual classification as “of antiquarian interest only.” Maybe. But consider the following four situations where there might currently be consequences for a donee holding a ‘power of attorney’ rather than a collateral power of attorney. First, a donee/holder of a general testamentary power of attorney ‘power of attorney’ could ratify trust breaches and thereby extinguish the interests of defaulting takers. This possibility is discussed in §8.14 of Loring and Rounds: A Trustee’s Handbook (2024). See Appendix below. Second, it may still be the case in some jurisdictions that property subject to a reserved security general inter vivos power of attorney is not subject to the claims of the principal’s creditors, whereas if the power of attorney were held entire, the property would be subject to such claims. This possibility is discussed in §5.3.3.1 of the Handbook. Third, consider a security general inter vivos power of attorney. The principal is X. The trustee is Y. Both the security usufruct and the security quasi-residue are in Z. If Y were to transfer title to Z, there would be a merger in Z. One consequence of the merger would be that X’s security power of attorney would expire. Now suppose that the power of attorney is held entire by X. For example, X is both the principal and the owner of the quasi-residue. Z is the current security beneficiary. If Y were to transfer title to Z, there would be no merger and thus no extinction of X’s security power. The subject of merger is discussed generally in §§ 8.7 and 8.15.36 of the Manual. Fourth, assume Y has a legal title to untrusted property. A legal, unfunded, incidental power of attorney to X would be invalid because it would be inconsistent with Y’s title. This would not necessarily be the case if the legal power were instead unfunded. Note that a legal, unfunded, incidental power of attorney in the context of a trust should not violate the doctrine of incompatibility unless there is a merger of the legal and legal title interests.