FIDUCIARY LITIGATION 4. Trying an Undue Influence Case By Tina N. Babel By Patrick T. Conner and Jared L. Dodd

Transcription

1 FIDUCIARY LITIGATION 4 Trying an Undue Influence Case By Tina N. Babel Playing With a Full Dec : Justiciability in Declaratory Actions By J. Rixey Ruffin and Clayton G. Kuhn Trustee Removal Under Section 706 of the MUTC By Christopher M. Blaesing and Andrew M. Bleyer Asset Protection Planning and Creditors Claims: General Powers of Appointment and Creditor Claims under the Missouri Uniform Powers of Appointment Act By Patrick T. Conner and Jared L. Dodd Avoiding Fights over No-Contest Clauses in Missouri By James F. Monafo and Robert J. Hurtt, Jr. Vol. 65, No. 3 Winter 2019

2 Asset Protection Planning and Creditors Claims: General Powers of Appointment and Creditor Claims under the Missouri Uniform Powers of Appointment Act By Patrick T. Conner and Jared L. Dodd Powers of appointment provide estate planning attorneys in the modern legal landscape the ability to provide a client with unmatched flexibility to mold their estate plan to address events neither the client nor the attorney could have predicted at the time the estate plan was initially implemented. While this added flexibility and control makes powers of appointment a valuable tool, given the evolving landscape surrounding creditor s claims against trust property over which the client has created a power of appointment, estate planning professionals must ensure their use of tools to provide flexible planning mechanisms does not cause unintended loss of valuable asset protection characteristics available to the client. This article will examine the historical characterization of the interest created by different types of powers of appointment, the ability of creditors to claim against property that is subject to a power of appointment ( appointive property ), and how Missouri s recent adoption of a form of the Uniform Powers of Appointment Act codifies the creditors rights related to general powers of appointment under the Missouri Uniform Powers of Appointment Act (the Missouri Act ). I. Powers of Appointment Generally A power of appointment allows the powerholder, also called a donee, to give rights or powers in the property that is subject to the power of appointment to another person. A power of appointment can generally be granted by a party that either owns the property or has a power of appointment granting such party the power to appoint the property to another (this party is known as the donor ). 1 Typically powers of appointment are created in trust agreements, allowing the powerholder the right to appoint the appointive property to another party or the right to create a new beneficial interest in the trust. Powers of appointment are especially useful in trusts that provide for trust property to remain in trust for multiple generations, allowing the powerholder to exercise the power to account for legal, tax, political, and family changes. Additionally, powers of appointment are used to allow certain transfers to qualify for certain estate and gift tax deductions or exclusions, or to prevent adverse generation-skipping transfer tax consequences. 2 Powers of appointment are subdivided into (1) special or limited powers of appointment and (2) general powers of appointment. 3 Special or limited powers of appointment are those powers of appointment that restrict to whom the powerholder may appoint the appointive property. 4 If the power limits the persons or class of potential beneficiaries of the power of appointment, the power will generally be considered a special or limited power of appointment. On the other hand, a general power of appointment (a GPOA ) is a specific type of power of appointment that grants the powerholder broad powers over the appointive property to appoint the property to anyone, including the powerholder, the powerholder s estate, the powerholder s 1. See Restatement (Third) of Property: Wills and Other Donative Transfers (2011), 17.1, comment a. 2. See Crummey v. Comm r, 397 F.2d 82 (9th Cir. 1968); see also IRC 2503(b), IRC 1014, and Treas. Reg (b); see also Mo. Rev. Stat (7) (2018) and Mo. Rev. Stat (11) (2018). 3. See Mo. Rev. Stat (7) (2018); see also Black s Law Dictionary (10 th ed. 2014). 4. Black s Law Dictionary (10 th ed. 2014). Patrick T. Conner, a partner at Husch Blackwell LLP, concentrates his practice in estate and business succession planning, focusing primarily on wealth, tax, trust and estate planning, along with business and corporate planning for privately-held businesses. He works with individuals, families, and business owners to design and implement plans to minimize income, gift, estate, and generation-skipping transfer taxes. He also represents fiduciaries, beneficiaries, and other claimants when controversies arise involving taxes, trusts, estates, and related property interests. Patrick earned his undergraduate and law degrees from Saint Louis University and a LLM in Taxation from Washington University School of Law. Jared L. Dodd, an associate at Husch Blackwell LLP, concentrates his practice in estate and business succession planning with an extensive background in corporate and business transactional matters. He counsels clients on both their personal and business holdings, helping to minimize transfer taxes and to implement business succession plans. Jared previously worked as a graduate tax intern with the Committee on Ways and Means within the U.S. House of Representatives where he assisted the Committee s Tax and Oversight staff in researching and preparing for hearings and other proceedings. He is a graduate of Saint Louis University and the University of Georgia School Of Law. 20 THE ST. LOUIS BAR JOURNAL/ WINTER 2019

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4 creditors, and the creditors of the powerholder s estate. 5 Some states and legal authorities consider GPOAs to be property interests, 6 while others consider GPOAs as less than a property right, such as a mere expectancy or right over the appointive property. 7 Powers of appointment are also subdivided based on when the power is exercisable by the powerholder. Those exercisable presently during the powerholder s life are referred to as presently exercisable and those exercisable at the powerholder s death are referred to as testamentary. 8 A power of appointment will be considered testamentary if it is only exercisable by the powerholder through the powerholder s will. 9 Contrarily, presently exercisable powers of appointment are those exercisable by the powerholder at the present time, whether or not such power is also exercisable by will. 10 Although some powers of appointment are clearly presently exercisable, some forms of powers of appointment are less obviously considered presently exercisable. For example, according to the Restatement (Third) of Property: Wills and Other Donative Transfers, a power that is exercisable by the last writing of the powerholder that is not revoked is considered a presently exercisable power of appointment. 11 While these powers typically explicitly state that they are exercisable by a writing other than a the powerholder s will, the general rule is that if the donor does not explicitly limit the exercise of such power to the powerholder s will, the power will be considered presently exercisable. 12 Further, in some instances, a power of appointment will be considered as presently exercisable even when the power remains subject to certain conditions or restrictions over the appointive property itself. For example, if the power provides that a trust is to pay income to X for life with the remainder passing to X s living descendants, otherwise to those persons appointed by X, such power is considered presently exercisable with regard to the remainder interest even though conditioned on X leaving no living descendants. 13 While both limited and general powers of appointment provide estate planning professionals and their clients with added flexibility, those utilizing GPOAs must be mindful that such flexibility is often accompanied by concerns related to asset protection and creditor claims against the appointive property. With the general background of powers of appointment in mind, it is important for estate planning professionals to understand the ramifications of creating and utilizing different types of powers of appointment, and specifically presently exercisable GPOAs and testamentary GPOAs. Particularly, it is important to note that legal authorities generally treat presently exercisable GPOAs and testamentary GPOAs differently with regard to the rights of a powerholder s creditors to claim against the appointive property. Such difference typically stems from the difference in the characterization of the type of property interest granted to the powerholder. While powers of appointment are a type of interest in property, most powers of appointment are not equated to beneficial ownership of such property, but rather the right to designate the recipient of beneficial ownership interests. 14 Beneficial owners of property generally have the power to transfer the ownership interests in, or confer powers of appointment over, the property at will. As one would presume, along with 5. Id. 6. See Krausse v. Barton, 430 S.W.2d 44 (Tex. Civ. App. 1968). the right to transfer ownership of the property comes the risk of having one s creditors attach such property. In many circumstances, powers of appointment only grant the powerholder the right to designate a recipient of appointive property, or a power of appointment over the appointive property at some future time, rather than the right to fully alienate and control the property. In other words, the powerholder is not able to exercise ownership equivalent rights. However, other powers of appointment do grant the powerholder ownership equivalent rights, and often, appointive property of such powers of appointment is more often subject to a creditor s claims. II. Historical Creditor Claims Against General Powers of Appointment As most limited powers of appointment place restrictions on to whom the powerholder may appoint the appointive property, such powers of appointment are generally not considered the equivalent of ownership of the appointive property, and thus, such property is typically beyond the reach of the powerholder s creditors. 15 However, in certain instances, GPOAs can be subject to claims of the powerholder s creditors. Historically, unless a specific statute provided otherwise, the ability of creditors to reach appointive property under a GPOA depends on whether the power has been exercised See University National Bank v. Rhoadarmer, 827 P.2d 561, (Colo. Ct. App. 1991). 8. Section (16); see also Restatement (Third) of Property: Wills and Other Donative Transfers (2011), Restatement (Third) of Property: Wills and Other Donative Transfers (2011), 17.4(b). 10. See id, 17.4(a). 11. Id., 17.4, comment a. 12. Id., 17.4, comment a, Illustration See Restatement (Third) of Property: Wills and Other Donative Transfers (2011), 17.4, comment b. 14. See Restatement (Third) of Property: Wills and Other Donative Transfers (2011), 17.1, comment c. 15. See Restatement (Third) of Property: Wills and Other Donative Transfers (2011), 22.1(a). 16. Restatement (First) of Property (1940), THE ST. LOUIS BAR JOURNAL/ WINTER 2019

5 Under common law, an unexercised GPOA created by someone other than the powerholder, whether testamentary or presently exercisable, was not subject to the claims of the powerholder s creditors. 17 Conversely, once the powerholder exercised the GPOA, the powerholder is deemed to have the equivalence of ownership of the appointive property, in turn subjecting such property to the claims of the powerholder s creditors. 18 The underlying theory of the historical common-law rules are that until the powerholder affirmatively exercised the power, the powerholder had not accepted sufficient control over the appointive property to be considered as an ownership-equivalent, in turn keeping such property out of the reach of the powerholder s creditors. 19 However, more recently, the prevailing view has evolved and multiple states have adopted statutes that overrule the common-law rule. In response, the American Law Institute ( ALI ) changed its position on creditor s rights over appointive property in its most recently adopted Restatement (Third) of Trusts, which takes the position that the rights of a powerholder s creditors depend not on whether the power was indeed exercised, but rather on the nature of the power. 20 As a preliminary matter, the more modernized rules reinforce the theme that a donor cannot avoid creditor claims by creating a GPOA vested in itself; in other words, a donor that is also the powerholder will not be able to use a fraudulent conveyance to avoid creditors. 21 The modern rules view presently exercisable GPOAs as synonymous to a right of withdrawal, granting the powerholder full ownership equivalent over the appointive property pursuant to the terms of the GPOA. 22 Specifically, the Restatement (Third) of Property: Wills and Other Donative Transfers outlines that appointive property subject to a presently exercisable GPOA will be subject to the claims of the powerholder s creditors due to the power s equivalence to ownership, which causes the appointive property to be treated as if it is actually property of the powerholder. 23 In light of this, presently exercisable GPOAs are most often subject to attachment by creditors, and creditors often can and do assert claims against appointive property that is subject to a presently exercisable GPOA. Even so, more often practitioners must be mindful of the potential for creditor attachment to appointive property at a testamentary GPOA powerholder s death. Testamentary GPOAs typically have not been subject to creditor claims during life based on the theory that the limited ability to exercise the power in a testamentary nature restricts the powerholder s right to exercise control over the property until the time of the powerholder s death. 24 Yet, upon the powerholder s 17. Id; see also Restatement (Second) of Property: Donative Transfers (1986), See Restatement (First) of Property (1940), 327; see also Restatement (Second) of Property: Donative Transfers (1986), See Restatement (Third) of Property: Wills and Other Donative Transfers (2011), 22.3, comment c. 20. Id. 21. See Restatement (Third) of Property: Wills and Other Donative Transfers (2011), See id., comment b. 23. See Restatement (Third) of Trusts (2003), 56, comment b. 24. See id., comment b. 25. Restatement (Third) of Property: Wills and Other Donative Transfers (2011), 22.3 (b). 26. Uniform Powers of Appointment Act, Uniform Law Commission, < 27. The Uniform Powers of Appointment Act (2013): A Summary, Uniform Law Commission, < 28. Id. 29. Id. death, such a power will generally become considered as similar to an ownership equivalent, thus causing the appointive property to become subject to creditor claims upon the powerholder s death. 25 While the ALI and many states began to adopt the modern view of appointive property and creditors rights, the move to clarify and codify the laws related to creditor claims against appointive property was just beginning. After the ALI s move to change its view of the rules relating to creditor claims, the Uniform Law Commission ( ULC ) determined that a law was needed to provide clear and binding statutory guidance to estate planning professionals. In 2013, the ULC adopted the Uniform Powers of Appointment Act (the Uniform Act ) and recommended the Uniform Act for adoption by all states. 26 The Uniform Act specifically addresses creditor s claims to appointive property. III. Added Clarity in Light of New Laws The Uniform Powers of Appointment Act and the Missouri Uniform Powers of Appointment Act The ULC adopted the Uniform Act to remedy the disconnect between the common and important use of powers of appointment in modern estate planning but the lack of statutory guidance governing their use, causing estate planners to rely on case authorities that did not adequately address gray areas related to powers of appointment, and more often inconsistently applied the law. 27 In the ULC s own words, the Uniform Act is largely a codification of the existing common law authorities, which is consistent with the general rules outlined in the Restatement (Third) of Property: Wills and Other Donative Transfers. 28 The Uniform Act, as promulgated, was not a desire to change the laws regarding powers of appointment; rather, the ULC desired to provide both practitioners and courts with a statute that is clear, consistent, and easy to reference. 29 In response to the ULC s adoption of the Uniform Act, the Missouri Bar appointed a THE ST. 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6 subcommittee of the Missouri Bar s Estate Planning Committee (the Committee ) to draft the Missouri Act; and consistent with the ULC, the Committee clarified that in developing the Missouri Act, the Committee s goal would not be to change Missouri s laws, but rather to codify Missouri law as it presently existed. The Missouri legislature adopted the Missouri Act, which was signed into law on July 13, 2016, and became effective on August 28, IV. Current Applicability of Creditor Claims under Missouri It should be noted that while the Missouri Act is largely similar to the Uniform Act, the Missouri Act contains modifications to promote consistency with existing Missouri laws, such the Missouri Uniform Trust Code ( MUTC ). 31 With the adoption of the Missouri Act, Missouri practitioners now have clear authority to rely on when incorporating powers of appointment in client plans. A practitioner s understanding of the consequences of subjecting appointive property to GPOAs is of paramount importance due to the asset-protection risks of creditor claims against the appointive property. Under Missouri law, a creditor or other assignee of a beneficiary or person holding a property interest may in certain circumstances attach to such trust property, obtain an order from a court forcing a judicial sale of the trust property, compel the exercise of the power, or reach the trust property or beneficial interest by other means. 32 Prior to the Missouri Act, it was difficult for practitioners to know with certainty whether certain kinds of powers of appointment, withdrawal rights, and other powers normally granted in trust documents would subject the underlying trust property to the claims of the powerholder s creditors. Operating without certainty can greatly increase the risk of client assets becoming exposed to undesired creditor claims. Article 5 of the Missouri Act provides specific guidance regarding creditors rights in appointive property. Preliminarily, the Missouri Act codifies the application of different rules based not only on the nature of the power, but also on the identity of the creator of the power. The Missouri Act codifies the well-settled rule that a donor may not shield property from creditor claims by fraudulently transferring the property with a retained power of appointment. 33 However, even for powers of appointment created by the powerholder, the Missouri Act shields appointive property subject to a GPOA in two specific circumstances. First, appointive property is not subject to claims of a powerholder s creditors if the powerholder irrevocably appoints the property in favor of a third-party. 34 Additionally, to remain consistent with the MUTC, the Missouri Act diverges from the Uniform Act and the modern view with regard to testamentary GPOAs and creditor claims, as the Missouri Act provides that a GPOA created by the powerholder will not be reachable by the powerholder s creditors if the GPOA is not presently exercisable. 35 However, it is not surprising that the Missouri Act, like the Uniform Act, allows creditors to claim against presently exercisable GPOAs, both those created by the powerholder and those created by someone other than the powerholder. 36 Further, the Missouri Act follows the ULC guidance by classifying rights of withdrawal as presently exercisable GPOAs to the extent of the property subject to the right of withdrawal. 37 The legislature seems to make clear that presently exercisable GPOAs and rights of withdrawal will be considered ownership equivalents that will allow creditors to exercise powers to compel the exercise of the power in favor of the creditor or otherwise to attach to the appointive property. Accordingly, in order to provide clients added flexibility without increased creditor risk, Missouri practitioners may be able to utilize testamentary GPOAs rather than presently exercisable GPOAs, which gives rise to a unique planning opportunity for practitioners. Such opportunity makes it imperative for practitioners to distinguish between presently exercisable GPOAs and testamentary GPOAs when operating under the Missouri Act. Under the Missouri Act, the general rule is that a power of appointment is considered a presently exercisable GPOA unless the terms creating the power of appointment specifically provide otherwise. 38 Thus, practitioners must be certain to include limiting language in their documents to shield appointive property from accidentally becoming subjected to creditor claims. V. Other States Responses to the Uniform Act and Hope for Broader Uniformity After its adoption, the ULC recommended the Uniform Act for adoption in all states given the wide usage of powers of appointment by estate planners in all 50 states. In response to the ULC s recommendation, along with Missouri, a number of other states, including Colorado, Illinois, Montana, Nevada, New Mexico, North Carolina, Utah, and Virginia, analyzed, developed, and adopted a law largely mirroring the Uniform Act, either in whole or in 30. See Senate Substitute for House Committee Substitute for House Bill See Susan B. Teson and Norman S. Newmark, The New Uniform Powers of Appointment Act (Part 1), Missouri Bar Journal, Volume 73, Number 2 (March- April 2017). 32. See Mo. Rev. Stat to 507 (2018). 33. See Mo. Rev. Stat (2018). 34. See Mo. Rev. Stat (1) (2018). 35. See Mo. Rev. Stat (2) (2018); see also Mo. Rev. Stat (2018). 36. See Mo. Rev. Stat (2018); see also Mo. Rev. Stat (2018). 37. See Mo. Rev. Stat (2018). 38. See Mo. Rev. Stat (2018). 39. Powers of Appointment, Uniform Law Commission, < org/act.aspx?title=powers%20of%20appointment. > 24 THE ST. LOUIS BAR JOURNAL/ WINTER 2019

7 part.39 Additionally, Kentucky s legislature is currently considering legislation that would adopt a version of the Uniform Act.40 The hope is that the Uniform Act will be adopted in a largely uniform format in all states such that practitioners can confidently utilize powers of appointment in their planning strategies without concerns regarding whether a change in a trust s situs, governing law, or state of administration could lead to unwanted creditor claims and loss of asset protections. The complexity of appropriately utilizing and executing powers of appointment in a client s plan is compounded when one considers the issue of what state s law applies to the interpretation of a power of appointment and a creditor s right to claim against the appointive property associated therewith. In Missouri, like under the Uniform Act, the creation, revocation, or amendment of a power of appointment is governed by the domicile of the donor at the time of the creation, revocation, or amendment of the power.41 However, the law of the state of the powerholder s domicile governs the exercise, release, or disclaimer of the power.42 In other words, not only must practitioners be aware of the domicile of the donor, but practitioners must also account for potential future changes to the power s scope and the donor s then current domicile. Even further, practitioners must account for the domicile of the powerholder and the potential changes to the powerholder s domicile. After accounting for the different domiciles, practitioners must then have a clear understanding of the nuances of the laws applying to powers of appointment from one state to the next. A non-uniform system of law relying largely on common law principles raises the risk associated with the cre- 40. Id. 41. See Mo. Rev. Stat (2018); see also Uniform Powers of Appointment Act See Mo. Rev. Stat (2018); see also Uniform Powers of Appointment Act 103. ation and use of powers of appointment, especially general powers of appointment, as the attorney cannot ensure what future law will apply to the power when creating the power at present. As the legal marketplace changes and boundaries between a client s family and business operations become less and less limited by state borders, a uniform application of the general rules across the United States regarding the rights of creditors to claim against appointive property subjected to different types of powers of appointment and other limited beneficial interests will be appreciated by clients and estate planning practitioners alike. More importantly, increased uniformity will allow creditors to more accurately assess rights in appointive property and individuals granting and holding powers of appointment to know with more certainty the rights and obligations associated with powers of appointment created or held by them. qqq It s a Matter of Trust. The Trust, Estate & Fiduciary Litigation team at Husch Blackwell provides banks, trust companies, trustees, executors, beneficiaries, heirs, and creditors with decades of experience handling disputes in or out of court and minimizing risks in the administration of trusts and estates. huschblackwell.com Patrick T. Conner, Partner James F. Monafo, Partner Jared L. Dodd, Associate Robert J. Hurtt, Associate Arizona California Colorado Illinois Missouri Nebraska Tennessee Texas Washington, DC Wisconsin The choice of a lawyer is an important decision and should not be based solely upon advertisements. THE ST. LOUIS BAR JOURNAL/ WINTER