Power of appointment
Lawiki for and by law students - find us on Facebook if you want to help us edit this Law Wiki.
Not professional advice - LAWIKI cannot guarantee the validity of any information
Generally speaking, the power to dispose of a trust property; that is, the power to confer the trust property on someone free of the trust. A power of appointment may be granted to a trustee, but it need not be. For example, a person may create a trust in his will that benefits the spouse for life, with the spouse having a power of appointment to benefit the children as is desired.
A person granted a power of appointment is often referred to as the 'donee' of that power, frequently shortened (somewhat confusingly) to simply 'donee' with no reference to the conferred power. Because a power of appointment allows the holder to give away property, it reflects a form of ownership right, although limited by the terms of the trust. For example, it is not unusual to grant someone a power to appoint, albeit solely through his will.
The property that a donee is entitled to appoint is, of course, the trust property. This may be in relation to income, capital or both. There are both winners and losers when any such appointment is made. Income conferred on those free of the trust is income lost to anyone who would otherwise 'take in default of appointment'. Similarly, capital appointed to trust outsiders (i) reduces the capital base from which income is earned and (ii) diminishes the amount that would instead go to those who would take in default.
A power of appointment may be classified as 'general', 'special' and 'hybrid' (or 'intermediate'), according to the class of objects for whose benefit it may be exercised. A power to appoint to anyone in the world, including the power holder himself, is a 'general' power. Such a power is tantamount to absolute ownership, although a universal power to appoint that is only exercisable in one's will (thus eliminating the power holder himself) is still a general power. A power to appoint to a restricted class of persons (e.g. 'to the testator's children') is a 'special' power. Lastly, a power to appoint to anyone except for a restricted class of persons (e.g. 'to anyone save the settlor or his spouse') is a 'hybrid' or 'intermediate' power.
Generally speaking, the donee of a power of appointment is not obliged to exercise that power unless the trust instrument so declares; a power whose exercise is not mandated by a trust is often called a 'mere power'. However, a power may be associated with a strong expectation that it will be exercised. Where this is so, the power is referred to as a 'power in the nature of a trust'. A power held by trustees ('power virtute officii') will usually be associated with some fiduciary obligations, and the trustee will in this case be obliged to at least consider exercising that power.