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Can A Power of Appointment Be Used To Transfer All Assets Out Of A California Trust?

Yes, a general power of appointment can be used to transfer the entire corpus of a California trust to one person if the terms of the trust permit.  In the April 2020 opinion in Tubbs v. Berkowitz, a  California surviving spouse used a general power of appointment to transfer the entire assets of a trust to himself.

The California court of appeals held that the surviving spouse’s use of the general power of appointment to transfer the entire assets of the trust to himself was not, and could not be, a breach of fiduciary duty under the terms of the Trust.

The Facts of Tubbs v. Berkowitz

Harry Berkowitz and his wife created a family trust (the “Trust”).  The Trust provided for the allocation of assets to a surviving spouse’s trust and a marital appointment trust upon the death of either Berkowitz or his wife.  The contingent beneficiaries of the Trust were trusts for their son and their daughter, Janice Tubbs, and her children (“Tubbs”).

The surviving spouse’s trust was revocable after allocation, while the Marital Trust was not.  Both the surviving spouse’s trust and Marital Trust contained a general power of appointment.  The general power of appointment allowed the surviving spouse to designate a person, including the surviving spouse, to receive the Trust assets.  The general power of appointment stated in pertinent part:

At any time during the surviving spouse’s life, the trustee shall distribute all or any part of the trust, including accrued income and undistributed income, to such one or more persons and entities, including the surviving spouse or the surviving spouse’s estate, and on such terms and conditions, outright, in trust, or by creating further powers of appointment, as the surviving spouse shall request by an acknowledged document that specifically refers to this power of appointment.

Berkowitz exercised the general power of appointment and transferred all of the Trust assets to himself.  Berkowitz’s transfer of the Trust assets to himself meant that Tubbs received nothing.  Tubbs did not like this and filed a petition asking the California probate court to find that Berkowitz could not transfer the assets to himself, because Berkowitz’s fiduciary duties as successor trustee limited his exercise of the general power of appointment.

What Is A Power of Appointment Under California Law?

A power of appointment is defined as follows under California law:

A power of appointment is a power conferred by the owner of property (the ‘donor’) upon another person (the ‘donee’) to designate the persons (‘appointees’)  who will receive the property [ (‘appointive property’) ] at some time in the future.

General v. Limited Power of Appointment

A power of appointment can be general or limited.  The California court of appeals summarized the distinction:

Such a power can be general—exercisable in favor of anyone, including the holder of the power or that person’s estate—or limited—exercisable only in favor of the person or class specified in the instrument creating the power. [Citation.] A trust can be the ‘creating instrument’ that ‘creates or reserves the power of appointment.'” (Estate of O’Connor (2018) 26 Cal.App.5th 871, 879, fn. omitted, italics added.)

A General Power Of Appointment Enables The Donee To Act In A Nonfiduciary Capacity

In this case, Tubbs argued that Berkowitz could not transfer the Marital Trust assets to himself because a trustee must comply with his fiduciary duties, even if granted “absolute, sole, or uncontrolled discretion.”  California Probate Code § 16081(a).

The California appeals court highlighted that Tubbs ignored a key feature of a general power of appointment in advancing this argument.  A general power of appointment enables the donee to act in a nonfiduciary capacity (unlike a trustee).  As defined in California Probate Code § 610(f):

“Power of appointment” means a power that enables a powerholder acting in a nonfiduciary capacity to designate a recipient of an ownership interest in or another power of appointment over the appointive property.  The term does not include a power of attorney.

Thus, California law governing general powers of appointment clearly contemplates that the power can be exercised without the weight of fiduciary duties, and to the detriment of other beneficiaries.

Here, the Marital Trust allowed Berkowitz, as surviving spouse, to designate himself as the recipient of the Trust assets.  Once Berkowitz did so, the Marital Trust then required the trustee (Berkowitz) to distribute the assets to any person designated by the surviving spouse, including the surviving spouse himself.

Thus, under the plain terms of the Marital Trust, Berkowitz (acting as the trustee) was required to transfer the assets once he exercised the power of appointment in his favor. He could not possibly have breached any fiduciary duties by doing something that was expressly authorized and required under the terms of the Marital Trust. (Hearst v. Ganzi (2006) 145 Cal.App.4th 1195, 1207-1208 [trustees did not breach their fiduciary duties where their actions were explicitly authorized by the trust].)

In closing, the court summarized:

Finally, we note that Berkowitz’s exercise of his power of appointment would have been unobjectionable if he had resigned as trustee before exercising the power. In that scenario, the successor trustee (Tubbs) would have been required to transfer the assets to Berkowitz once he exercised the power of appointment in his favor.  Tubbs claims “those are not the facts before this Court,” but we see no reason why the result should be different where Berkowitz was both the donee and the trustee who had no discretion but to follow the terms of the power of appointment.

 

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