Take-Away: The exercise of a power of appointment is controlled by the instrument that creates the power of appointment. As a generalization, the residuary clause of the powerholder’s Will does not exercise the power of appointment.

Background: It is generally said that a power of appointment is one of the most useful tools in estate planning, since it provides tremendous flexibility to address beneficiaries’ changes in circumstances while its presence can expose, or prevent, assets subject to the power from an income tax basis adjustment on the powerholder’s death. Accordingly, powers of appointment are often used in trusts, exercisable by a trust beneficiary over the assets that are titled in the name of the trust. The timely exercise of a power of appointment can shift substantial assets away from, or out of, the trust, making the exercise of the power of appointment extremely important, but also drawing attention by those individuals who would have taken the assets, but for the exercise of the power of appointment.

Residuary Clause: A general residuary clause in a Will, or a Will that makes a general disposition of all of the testator’s property, does not exercise a power of appointment held by the testator, unless specific reference is made in the Will to the power of appointment, or there is some other indication of the testator’s intention to include the property that is subject to the power of appointment as part of the testator’s estate that is disposed by his or her Will. [Uniform Probate Code, 2-610.]

Exercise of the Power of Appointment: On occasion, the question arises on the powerholder’s death if the powerholder effectively exercised their power of appointment in order to control who benefits from the trust-held assets after the powerholder’s death. To address this situation, the Estates and Protected Individuals Code [EPIC], along with the Michigan Power of Appointment Act, both describe when the exercise of a power of appointment is by the powerholder’s Will is effective.

EPIC:  “If a governing instrument creating a power of appointment expressly requires that the power be exercised by a reference, an express reference, or a specific reference to the power or its source, it is presumed that the donor’s intention, in requiring that the donee exercise the power by making reference to the particular power or to the creating instrument, was to prevent an inadvertent exercise of the power.’ [MCL 700.2706.]

Presumption: Thus, the mere use by the powerholder of a blanket-exercise clause in his or her Will would be ineffective to exercise the power of appointment because such a clause would not make sufficient reference to the particular power. Note, though, that if it can be shown that the powerholder had knowledge of and intended to exercise the power of appointment, such a blanket-exercise clause in the powerholder’s Will would be sufficient to exercise the power of appointment, and  thus overcome the statute’s presumption.

Michigan Power of Appointment Act: “Unless otherwise provided in the creating instrument, an instrument manifests an intent to exercise the power if the instrument purports to transfer an interest in the appointive property that the donee [powerholder] would have no power to transfer except by virtue of the power, even though the power is not recited or referred to in the instrument, or if the instrument either expressly or by necessary implication from its wording interpreted in the light of the circumstances surrounding its drafting and executions, manifests an intent to exercise the power. 

Subject to other provisions of this section, if there is a general power exercisable by Will with no express gift in default in the creating instrument a residuary clause or other general language in the donee’s [powerholder’s] Will purporting to dispose of all of the donee’s estate or property operates to exercise the power, but in all other cases such a clause or language does not itself manifest an intent to exercise a power exercisable by Will.” [MCL 556.114(4).]

Residuary Clause: Under the Michigan Power of Appointment Act the powerholder’s residuary clause could effectively exercise the power of appointment, but only if two conditions are met: (i) it must be a general  power of appointment; and (ii) there is no gift in default, or sometimes referred to as there is no ‘taker-in-default’ of the nonexercise of the power of appointment.

Extrinsic Evidence: The Michigan Supreme Court had the occasion to address the Michigan Power of Appointment Act’s provision that would recognize the implicit exercise of a power of appointment. In Hund v. Holmes, 395 Mich. 188 (1975) the Court found that the Michigan Power of Appointment Act prohibited the use of extrinsic evidence [i.e. outside the ‘four corners’ of the Will] to show that the powerholder intended the residuary clause in his Will to exercise a power of appointment:

“This statute restricts the use of extrinsic evidence to circumstances surrounding the drafting and execution of the instrument and prohibits the introduction of such evidence unless it explains or clarifies some ‘wording’ of the instrument. It also declares that when the donor has provided an express gift in default, the language of a residuary clause does not manifest the intent to exercise a power.”

The upshot of the statute, as interpreted by the Supreme Court, is that it will be very difficult to prove an intent to exercise a power of appointment by the powerholder’s Will’s residuary clause,  since technically speaking, the powerholder does not ‘own’ the property that is subject to their power of appointment.

Conclusion: As noted earlier, powers of appointment are very powerful tools used in estate planning to inject flexibility into an estate plan. Sometimes the power of appointment is not called that, and sometimes a power of appointment is not readily discernible in a governing instrument, which is broadly defined in EPIC. [MCL 700.1104(m).] As such, they may exist, but the powerholder is not even aware that they hold the power. Therefore, it is important to review all estate planning instruments, beyond trust instruments to include deeds wills and insurance policies to determine if a power of appointment exists, and to the extent that one does exist, then identify if, and how, the power is to be exercised by the powerholder.