EXECUTIVE SUMMARY: COMMENT:

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1 Subject: Alexander Bove - Nobody s Perfect: The Naked Power of Appointment Embarrasses the Drafting Committee of the UPOAA at the Expense of Planners and Clients It seems the drafting Committee assigned to modernizing the Uniform Power of Appointment Act (UPOAA) misunderstood to some extent the meaning of the verb to modernize. In fact, since the Committee promulgated its final version of the Act in 2013, there have been several negative reactions by practitioners, including at least one law review article based the Restatement (Third) Property, which was basically mimicked by the UPOAA Committee; so virtually all of the comments and criticisms in that article apply as well to the UPOAA. Now, Alexander A. Bove, Jr. provides members with commentary that reviews the final version of the Uniform Power of Appointment Act, and its requirement that the only way to create a power of appointment is by a transfer of the property which is to be subject to the power. Members should note that his commentary is excerpted in large part from the author s article Don t Be Shy About Using a Naked Power of Appointment, that appeared in the December, 2016 edition of Trusts and Estates. Alexander Bove is an internationally known and respected trust and estate attorney with over thirty-five years of experience in the field of trusts and estates. He is Adjunct Professor of Law, Emeritus, of Boston University Law School Graduate Tax Program, where he taught estate planning and advanced estate planning for eighteen years. In 1998 he was admitted to practice as a Solicitor in England and Wales, and in 2013, he earned his Ph.D. in Law from the University of Zurich. His practice encompasses domestic and international estate planning and asset protection planning, and he is regularly consulted by attorneys and other professionals on issues relating to cross-border estate planning in

2 such jurisdiction as the UK, Italy, Germany, and France, among others. Mr. Bove has lectured at the annual Heckerling Tax Institute, the annual meeting of the American College of Trust & Estate Counsel (ACTEC), the Association of Advanced Life Underwriters (AALU), the Million Dollar Round Table (MDRT), The Top of the Table, the Annual Notre Dame Estate Planning Institute, the Southern California Estate Planning Institute, and The International Academy of Estate and Trust Law. Mr. Bove was named in The Best Lawyers in America, Trusts and Estates for and was elected to the National Estate Planning Hall of Fame in He has published seven books and over 1,000 articles on trust and estate-related topics. One of his books, The Complete Book of Wills, Estates and Trusts, published by Holt, NY, has over 100,000 copies in print. His latest book, Trust Protectors A Practice Manual with Forms is available for order through Juris Publishing at: Here is his commentary: EXECUTIVE SUMMARY: The drafting Committee appointed by the Uniform Law Commission to modernize The Uniform Power of Appointment Act badly missed the boat when it decided to perpetuate the antiquated, controversial, and cumbersome practice of requiring a transfer to create a power of appointment (the one exception to the rule is not relevant). The effect of this troublesome and poorly thought-out rule is to require either the unnecessary establishment of a revocable trust which the transferor often would not need or want, or the ridiculous exercise of transferring the property to a straw, subject to the power in someone other than the straw, who would then transfer the property back to the donor of the power. COMMENT: It seems the drafting Committee assigned to modernizing the Uniform Power of Appointment Act (UPOAA) misunderstood to some extent the meaning of the verb to modernize. In fact, since the Committee promulgated its final version of the Act in 2013, there have been several negative reactions by practitioners, including at least one law review article i based the Restatement (Third) Property, which was basically

3 mimicked by the UPOAA Committee; so virtually all of the comments and criticisms in that article apply as well to the UPOAA. Transfer of Property Required One of those critical comments calls attention to section 201(a)(1)(B) of the UPOAA, which, in essence, provides that with one exception, the only way to create a power of appointment is by a transfer of the property which is to be subject to the power. The subject of this commentary is to illustrate the Committee s lack of understanding of a basic principal in powers of appointment in adopting that rule. For example, say that Tom, who owns and wishes to retain his interest in Blackacre, wants his daughter to be able to appoint Blackacre to and among his grandchildren on his death. Assuming Tom doesn t wish to go through the time, trouble and expense of creating a trust, nor does he wish to grant the power in his will, which would require waiting for the completion of the probate process before the power could be exercised, Tom is forced to deed the Blackacre to a straw, who in turn would deed the property back to Tom, but the straw s deed to Tom would include a power in Tom s daughter to appoint the property on Tom s death. (Alternatively, Tom could include the power in his deed to the straw.) What is the reason that a transfer of the property must accompany the grant of the power? The reason the Committee gave was, it s always been done that way (luckily we didn t have the same individuals on the UTC Committee) and the Restatement (Third) Property requires it. That s like saying because my father said so. What s the legal basis for the rule? Unfortunately, absolutely none is given because there is none. There is no legal reason that the owner of property can t simply grant a power over that property by a declaration in a deed. In other words, Tom would simply execute a deed stating, I hereby grant my daughter, Teresa, the power to appoint Blackacre in whole or in part, etc., etc. On the recording of Tom s grant, why wouldn t the rights of all parties be fixed? As the fee simple owner of the property, doesn t Tom have the inherent authority to grant rights and powers over that property to others? Couldn t he grant, for example, a power of sale? Or, in this case, a power to encumber the property? Or a right to purchase the property?

4 Suppose, for example, Tom grants Teresa an option to purchase the property for $1,000, exercisable at any time, say, within two years after Tom s death. This option certainly wouldn t require a transfer of the underlying property to be effective and enforceable. And say that that option is transferable by Teresa in whole or in part, so Teresa could transfer the option in shares to Tom s grandchildren, which they could exercise at will, producing basically the same result as if she had a power of appointment! Obviously, this type of grant isn t covered by the UPOAA, but what s the difference? ii Meaningless Exercise Clearly, the burdensome requirement to use a straw to create a POA over property is every bit as outmoded and unsupported as it appears. The very concept of the strawman is itself based on a meaningless exercise, required more by tradition and adherence to antiquated legal concepts than by any sound basis in the law. The name purportedly comes from men who would wait around courthouses with pieces of straw in their shoes, a sign that they would be a willing third party to any legal transaction but would act only as a passive stand-in to satisfy some technically required step for said transaction. A perfect example of this involves joint property. If Tom, the owner of Blackacre, wished to add his son as a joint tenant on the property, Tom would be required to deed Blackacre to a straw, and the straw would immediately deed the property back to Tom, but would add Tom s son as a joint tenant in accordance with Tom s instructions. This is because the creation of a joint tenancy in real estate required that all of the joint tenants each acquired his interest at the same time and by the same deed, under medieval English law. The same rule also applied to a husband and wife who wanted to hold their property as tenants by the entirety. Fortunately, most jurisdictions in the United States finally recognized how meaningless this exercise was and passed statues that would allow a property owner to deed his property to himself and another as joint tenants without the need for a straw. Similar statutes were passed allowing spouses to create tenants by the entirety by a deed from one to both, finally updating a centuries-old cumbersome law. Fast forward to today s UPOAA, which for no good reason, revives or at least perpetuates the strawman requirement. Perhaps the Committee was thinking of medieval land law, which prohibited the landowner from

5 transferring his land by will and hadn t yet developed trusts? In that time, a landowner who wished to give control to say, family members, would have to transfer the land to the equivalent of a straw, under the agreement that the straw would later transfer the land to designated others. This led to the development of the trust concept to allow the landowner to transfer the land to a feofee who would hold the land for use of another. The feofee was essentially a trustee, iii who would later transfer the land to those designated in the use. No doubt the Committee members felt bound by the medieval law and decided to perpetuate it in its 21 st century version, in spite of the ridiculous requirement, the unnecessary risk, and expense of using a straw. That is to say, the straw is tantamount to a trustee, because of the agreement that despite the straw s ostensibly fee simple interest, he does not have an equitable interest, and he will immediately deed the property back to the owner after adding the power of appointment. In that case, it would seem that the owner (Tom in our example) would be required to report the transfer to a trust on a gift tax return as required by the regulations? iv He might also need to obtain a tax ID number. And what if there s a delay in the completion of the transfer and the straw is the subject of a lawsuit? Interestingly, there s law to support the proposition that a creditor may have a claim on the property, v unless of course a trust arrangement can be proven, as noted, with a gift tax return and an ID number for evidence, or better still, a written agreement with the straw (more expense). And, what if the straw dies before completion of the transfer or just refuses to complete the transfer unless payment of a premium is made? All unlikely? Yes. All impossible? Absolutely not! What was the Committee thinking? Pick and Choose Relevant Sections Perhaps we can find relief in the proof that the Committee s position is clearly misguided, and so needn t be followed (except for the jurisdictions that adopt the UPOAA as is). There s substantial commentary in trust law, for example, to demonstrate that a trust can be created by a simple declaration with no transfer, and the declaration can include the grant of a power. vi

6 In addition, in a response to the question challenging the requirement of a transfer to create a power, one of the world s most respected scholars on the subject of powers of appointment and the author of a premier treatise on the subject, vii has stated [referring to a power under a trust], this clearly does not mean that there must be a transfer of property which is the subject matter of the power. This would be nonsense. Such a conclusion would effectively render it impossible to create a trust by self-declaration. viii This important input was offered to the Committee and, unfortunately, simply ignored. So where does this leave us? If the UPOAA is adopted as is, we would be in a position in which, in creating a power of appointment but not wishing to make a gift, we would be forced to choose between either forming a trust (and transferring the property into the trust) or using a straw to carry out the two totally superficial steps of a bogus transfer. And then if we didn t want to retain the trust, we would deed the property out of the trust back to the donor of the power. What could be more of a fruitless exercise and expense? Therefore, if the UPOAA is not adopted with its several defects, ix then it should be permissible to simply grant a naked power with no need to transfer the property and with no interest attached to it. I know of no jurisdiction that has a separate statute requiring a transfer to create a power. The only dressing the naked power would need would be a valid deed with proper wording to grant the power, indicating the permissible appointees. More specifically, in the words of one respected treatise on the law: to create a valid power of appointment, the donor must intend to create a power, must indicate by whom the power is held, and must specify the property subject to the power. It is also essential that the objects to be benefitted by the execution of the power be specified or clearly discernible. x There is no specific requirement that the subject property be transferred in order to create a power! Thus, jurisdictions that are contemplating adopting the Committee s version of the UPOAA would be well advised to carefully pick and choose those sections that are properly thought out and that do not perpetuate confusion or needless expense or demonstrate a lack of understanding of the underlying law.

7 HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE! Alexander A. Bove, Jr. CITE AS: LISI Estate Planning Newsletter #2522 (February 27, 2017) at Copyright 2017 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited Without Express Permission. CITATIONS: i For a thorough, articulate and insightful analysis of the oversights in the Restatement (Third) Property treatment of the power of appointment law, see Charles E. Rounds, Jr., Old Doctrines Misunderstood, Quinnipiac Probate Law Journal, Vol. 26 No. 3. At p.240 (2013). ii iii Ignore tax issues. See 5 American Law of Property 23.2 (Casner ed. 1952). iv See 26 CFR , providing that where a transferor of property believes that the transfer is not a complete gift, he must not disclose the transfer on a gift tax return explaining why the gift is incomplete and offering appropriate evidence to support that position. v For example, see Robert N. Cook, Straw Men in Real Estate Transactions, Washington University Law Quarterly Vol. 25, 232 (1940) stating at P 248, If the grantor has only a moral right to the land, because the agreement to reconvey was oral, then all creditors of the straw

8 man would have righter superior to those of the original grantor so long as the straw retain title. vi vii Rounds, supra note 3, at Part IIIA, pg Prof. Grant Thomas, Powers, pub Street and Maxwell. viii From a communication to the author, May 14, ix Rounds, supra note 1. x 62 Am. Jur. 2d 32.