Should You Incorportate a Personal Power Into Your Client’s Trust?
A settlor does not normally choose someone to be a trustee unless the settlor has a high degree of confidence in the person chosen.1 H aving stated the obvious, a “personal power,” sometimes also referred to as a “confidential power” or a “mere power,”2 is a discretionary power granted based upon the confidence that the settlor has in a particular individual.3 The distinction between appointing someone as trustee and giving that person a personal power has to do with the settlor’s degree of confidence. With a personal power, the settlor’s confidence is more than the degree of confidence that the settlor would normally have in the typical trustee. conferring a personal power, the settlor is implicitly stating that there is no one, not even a court, who can exercise the discretion granted as well as the individual chosen. If your client wants to give someone the last word over one or more decisions relating to a trust, a personal power might be just what he or she is looking for.
A personal power pertains to the person holding the power; it does not relate to the office to which the power holder has been appointed. According to one secondary source, the power cannot be exercised by a court.4 This aspect will be discussed in more detail later in this article.
A personal power has been described as both “discretionary with” and “personal to” the power holder.5 B ecause it is “personal to” the power holder, the holder should not be obligated to act reasonably, as he or she would under Florida law, for instance, if he or she were the trustee and possessed either simple or absolute discretion.6 It is probably inaccurate to compare the level of discretion that the holder of a personal power has to absolute discretion. The best description, based on the authority granted, would be “sole and uncontrolled” discretion.
Although one court has stated that personal powers are held in a fiduciary capacity,7 There is some disagreement on this point.8 R egardless of whether a personal power is a fiduciary power, the power holder is presumably bound by the duties imposed by the new Florida Trust Code, such as the duties of good faith9 and the duty of loyalty.10 H owever, as explained below, the power holder may not be bound by a duty to act impartially.11
Requirements for Creating a Personal Power
There is only one requirement necessary for creating a personal power: the settlor must clearly and unmistakenly manifest his or her intention to create such a power in a particular trustee.12 A bsent such a clear statement of intent, there is a legal presumption that any powers granted to trustees are impersonal powers and not personal powers.13
If the trust is not clear as to whether a specific power is personal, a court will seek to ascertain the settlor’s intent. As with most trust construction issues, in order to determine if a personal power is present, a court must examine the trust instrument as a whole and, when necessary, must examine the circumstances surrounding the execution of the instrument.14 Therefore, to avoid any confusion, the most prudent way to guarantee that a power will be treated as personal is to clearly and unmistakenly say so in the trust instrument.
Limits of a Court’s Control Over Personal Powers
• The Jurisdiction of a Florida Court — F.S. §736.0201 provides Florida courts the authority to determine if a trustee actually possesses a personal power. However, assuming the court finds that a personal power exists, what authority does it have to determine if the power holder is acting properly? There is apparently no Florida case law on point; thus, the answer must come from the common law in other states. In this respect, the Supreme Court of North Carolina, citing Lewin on Trusts has stated: “In the case of mere powers, that is, powers of which the exercise is arbitrary and discretionary, the court has no jurisdiction to interfere.”15
Concluding that a Florida court has no jurisdiction over a personal power might be somewhat of an overstatement, particularly considering the widely-accepted rule that a settlor cannot place a fiduciary discretion entirely beyond the control of a court.16 It is suggested that there are certain acts, as explained hereinafter, in which a court would always retain jurisdiction.
• Limits of a Court’s Control — As mentioned previously, some commentators have stated that a court cannot exercise a personal power.17 M ore accurately, since a court never actually exercises a trustee’s power (that is, it either directs the trustee to act, enjoins him from acting, or sets aside an improper act),18 p resumably what is meant in this respect is that a court cannot direct the trustee in the exercise of the trustee’s discretion (that is, substitute its judgment for the trustee’s) over whether to exercise a personal power.
Compare this result to the principles that apply when a trustee possesses either simple or absolute discretion. In such a case, Florida Jurisprudence Second states: “Provided a trustee acts in good faith and within the limits of the sound discretion of the trust placed in him or her, equity will not substitute its judgment for that of the trustee, or interfere with that discretion without cause.”19 So, the distinction appears to be one in which a court “cannot” intervene versus one in which a court “will not” intervene ( i.e., unless the trustee has clearly acted improperly).
But, what is the actual extent of a court’s control when a personal power is involved, and why will a court not involve itself in the exercise of the trustee’s discretion? Florida Jurisprudence, Second, cites American Jurisprudence, Second, in support of the notion that a court cannot exercise a personal power. The case upon which American Jurisprudence, Second, relies in this regard is Welch v. Wachovia Bank & Trust Company, 38 S.E. 2d 197 (N.C. 1946). In that case, the court concluded that it should not interfere because, by including a personal power, the settlor manifested an intention that under no circumstances should the power be exercised by anyone but the named individual.20 d esignating a power as personal, the settlor is clearly and unmistakenly manifesting his or her intention that he or she wants to rely solely on the wisdom and judgment of the chosen individual. The rule in Florida is well established that “the intention of the grantor as expressed in the trust controls the legal effect of the dispositions therein made.”21 Therefore, as long as the trust is clear that the settlor intended to confer a personal power, there is a theoretical underpinning for a court to conclude that it cannot intervene.
The case of French v. Northern Trust Co. , 64 N.E. 106 (Il. 1902), supports the above position. It states: “[w] here a power is discretionary, and of a kind that indicates personal confidence in the one selected to exercise it, a court of equity will not assume to exercise the discretion….”22 r ecognizing the personal confidence that the settlor has in the power holder, and by respecting that confidence, a court is abiding by and following the intent of the settlor.
T here is another reason why a court should not have the power to intervene when a personal power is involved. The Supreme Court of Errors for Connecticut, in the case of South End Bank & Trust Company v. Hurwitz, 21 A.2d 407 (Ct. 1941), has stated: “The matter is not left to the unguided discretion of the trustee; a standard is set; but it is one which furnishes no guidance to a successor trustee in exercising the power, nor to a court of equity in reviewing his decision to see if he acted properly.”23
It is suggested that a standard that furnishes no guidance on how the trustee should act is really no standard at all. However, regardless of whether there is actually a standard in the trust instrument to guide the trustee’s conduct, this court is still correct that, with a personal power, there is lack of any guidance as to how the trustee should act. Absent some objective criteria as to how the trustee should have acted, there is nothing against which a court can judge the trustee’s actions to determine whether the trustee has acted properly. Consequently, a court cannot question the trustee’s exercise of the power.
Consider also the nature of a personal power. A personal power has been described as “personal to” the power holder,24 and calling for the “personal judgment” of the power holder.25 What the settlor wants in conferring a personal power is the judgment of one particular person — the power holder. That is the only opinion in which the settlor is interested. If a court were to question the trustee’s decisions, it would be failing to abide by the intent of the settlor, as indicated by the designation of the power as personal to the holder.
In granting a personal power, the settlor understands that the trustee’s personal judgment is clearly subjective ( i.e., to act as he or she deems appropriate), but the settlor has a special confidence that the trustee will act as he or she would have wanted, or at least in a manner that the settlor would have permitted. The settlor further implicitly recognizes that the judgment of the holder of a personal power might not always be rational. Also, since the settlor is presumed to be aware of applicable law in this instance,26 he or she is presumed to know that the power may in fact be exercised in an arbitrary manner.27 If you ask 10 people for their personal judgments regarding when, if, and how to exercise a personal power, you might get 10 different answers. And, no court could dispute that they were not all proper personal judgments. A personal judgment is in the nature of a personal opinion: Everyone has one, and they can differ widely. There is really no right or wrong when asking for someone’s personal judgment.
• The Extent of a Personal Power — Even if a trustee has a personal power, there is certain conduct that arguably would not be tolerated by any Florida court. Consider, for example, if the holder of a personal power takes a bribe to exercise the power in the briber’s favor. Such conduct is clearly dishonest behavior. A court under such circumstances would be justified in setting aside the transfer, and perhaps, also in removing the trustee. Notwithstanding the fact that the power is personal, Florida public policy requires, at a minimum, that a trustee be answerable on matters concerning the trustee’s honesty. In addition, subparagraph (e) of paragraph (2) of §736.0105 of the new Florida Trust Code provides that one power a settlor cannot draft around is the power of a court to take such action and exercise such jurisdiction as may be necessary “in the interest of justice.” Preventing dishonest behavior is clearly in the interest of justice.
A second situation in which a Florida court can intervene is when the trustee’s conduct is for some motive other than the accomplishment of the trust’s purpose. For example, assume that the settlor creates a trust solely for the purpose of providing discretionary payments for the “education” of a beneficiary ( i.e. , an education trust). Assume, further, that the trustee’s discretionary power over the above distributions is designated as a personal power. If the trustee makes a distribution to provide for plastic surgery for the beneficiary, such a distribution is for a motive other than the accomplishment of the trust’s purpose. In this situation, F.S. §736.0105 (2)(b)
applies. To the extent the personal power is exercised to make a distribution not in accordance with the purposes of the trust, the exercise of the personal power would be improper and should be overturned.
Does the Power Holder Have a Duty to Act Impartially?
Section 736.0803 of the new Florida Trust Code states that trustees owe a duty of impartiality whenever a trust has two or more beneficiaries. Does this duty of impartiality apply when the trustee possesses a personal power? In this respect, case law exists in support of the proposition that a court cannot exercise a trustee’s discretion over a personal power.
Reconciling the above is relatively simple when one considers §736.0105(2). That section sets forth the instances in which the provisions of the new Florida Trust Code trump the terms of the trust instrument ( i.e. ,
prevail over the settlor’s intent as expressed in the trust). The duty of impartiality is not one of those exceptions.28 Therefore, as long as a settlor expressly provides that the trustee does not have to act impartially in dealing with beneficiaries, the settlor’s expressed intention would control. Even though the mere designation of a power as personal might be sufficient to overcome any questions as to a trustee’s duty to act impartially, language waiving such a duty would provide complete certainty, and, therefore, is suggested.
Tax Consequences of a Personal Power
Consider the possible estate and gift tax consequences when the surviving spouse is the sole trustee of a trust ( i.e., credit shelter trust) that has the following invasion provision: “The trustee may pay to my spouse such sums from the principal of the trust estate as the trustee, in her absolute discretion, determines necessary for her health, support, and maintenance.”
With the above provision, there should be no adverse tax consequences. That is because under Florida law, a trustee who possesses absolute discretion still must act “reasonably.”29 This means that the spouse/trustee under these circumstances can only distribute to himself or herself an amount somewhere between the minimum and maximum amount that is reasonably necessary for her health, support, or maintenance.33 The amount that the trustee can distribute to herself is both 1) ascertainable; and 2) relates to her health, support, and maintenance. Having met both these requirements, the above provision meets the exception in Regulations 20.2041-1(c)(2) and 25.2514-1(c)(2) and is, therefore, not a general power of appointment.
Consider, however, the possible tax consequences if the following provision is used:
The trustee may pay to my spouse such sums from the principal of the trust estate as the trustee, in her sole and uncontrolled discretion, determines desirable for her health, support and maintenance. It is my specific intention that the above power given to the trustee over distributions shall be deemed to be a “personal power” and shall not be subject to question by anyone, including the current beneficiary, the remaindermen or any court.
This is the Independence Bank Waukesha, N.A. v. U.S., 761 F.2d 442 (7th Cir. 1985),30 s cenario with the added dimension that the power is designated as personal. The issue here is whether the trustee can distribute to herself amounts in excess of the maximum amount reasonably necessary for her health, support, and maintenance. If so, then the IRS could argue that the above provision is not “ascertainable” in its relationship to the spouse’s health, support, and maintenance as required by the above mentioned regulations. replacing the term “necessary” in the first provision with the term “desirable,” the trustee presumably has greater authority over distributions. What the spouse/trustee might determine to be desirable for her support can be something more than what is necessary for these purposes, particularly if the spouse can use her personal judgment.
Consider also that a court cannot exercise the trustee’s discretion with a personal power.31 This implies that the spouse/trustee might be able to act at least somewhat unreasonably and, still, a court would not challenge the trustee’s actions, as long as the trustee’s action does not rise to the level of being for some purpose other than the accomplishment of the purposes for which the trust was created. If this is the case, the trustee could make distributions to herself in excess of what is reasonably necessary for her health, support, or maintenance. If so, then both §2041 and §2514 might apply. The fact that the trustee must act in good faith under the new Florida Trust Code32 d oes not solve the problem. The duty to act in good faith has been found not to create an ascertainable standard where otherwise there would be none.33
What effect does F.S. §737.402(4)(a) have on this situation? One purpose of that section is to prevent a trustee from exercising tax sensitive powers, thereby preventing any possible tax consequences. However, there is an exception in this statute when the discretionary distributions relate to the trustee’s health, education, maintenance, or support.34 That exception applies in this instance. Therefore, the trustee is not prevented from exercising the power under these facts and tax consequences could result.
In light of the above possible tax consequences, only disinterested individuals should be given personal powers. Further, the disinterested individuals should be precluded for using those powers for their direct or indirect benefit. Finally, any power to change the dispositive terms of the trust, or to change the beneficiaries of the trust, should expressly exclude any action that might directly or indirectly benefit the trustee.
Situations in Which to Consider a Personal Power
The following are some instances in which a settlor might want to include a personal power.
• Power to Sell Trust Property — A good number of the cases dealing with whether a power is a personal power involve powers of sale.35 Particularly if the trust has just one major asset or if there is a special type of assets ( i.e., art work, stock options, gold futures, etc.), whether to sell the asset and when it should be sold are questions that the settlor might want to vest in someone who has a special expertise in that respect.
• Power to Terminate the Trust — There are certain situations in which a settlor believes a beneficiary currently does not have, and may never possess, the character, competence, and/or judgment to properly manage the assets in the trust. In such a case, he or she might want to leave it to the judgment of someone he or she has a special confidence in to determine when and if the trust should be terminated and be distributed to the beneficiary.
• Using a Personal Power with a Broad Invasion Standard — A personal power can provide added flexibility to a broad invasion standard. Assume that a settlor wants to create a support trust for the beneficiary, but also would like to provide the opportunity for additional benefits to the beneficiary over and above support. In such a case he or she could choose to add a discretionary “best interests” invasion provision ( i.e. , designated as a personal power) in addition to a mandatory “health, support, and maintenance” provision in the trust. Consider how the following provision might enhance the trustee’s authority:
My trustee may also pay to my son such amount or amounts of the principal of the trust estate as the trustee in her sole and uncontrolled discretion deems appropriate from time to time for his best interests. In exercising her discretion, the trustee shall not concern herself with what, if any, amount of the trust estate remains for the remaindermen. I expressly waive any duty of impartiality that my trustee might otherwise have under Florida law. It is my specific intention that the above power given to the trustee over distributions shall be deemed to be a “personal power” and shall not be subject to question by anyone, including the current beneficiary, the remaindermen, or any court.
When a standard such as “best interests” is provided, questions always arise as to the intention of the settlor in including that standard. If a requested distribution is within the definition of the standard used, does the beneficiary have a right to demand the distribution or does the trustee have the final say? Also, with such a power, the trustee always has to be concerned with the interests of successor beneficiaries and remainder beneficiaries.36
The above provision should resolve most of these problems. designating the above power as a personal power, the drafter has just about eliminated any chance of the son successfully arguing that he is entitled to a new Corvette on his 16th birthday. On the other hand, the trustee could decide that the son would benefit from a senior class trip to Europe and make a distribution for that purpose. Finally, if the trustee believes that the entire trust should be distributed to the son on his 30th birthday, the trustee no longer has to be concerned about the interests of remaindermen.
• Personal Powers and Health, Support, and Maintenance Provisions — Consider the situation in which a trustee has absolute discretion over distributions for a beneficiary’s health, support, and maintenance. In such a case, assuming that a court finds that the settlor’s intent was to create a support trust, there is Florida case law to the effect that a trustee must act reasonably when exercising the discretion.37 This means that the trustee must pay to or apply for the benefit of the beneficiary an amount somewhere between the minimum and maximum amount necessary to adequately support the beneficiary, considering possibly the beneficiary’s income ( i.e., if the invasion provision so provides) and the beneficiary’s station in life.
Assume that one of the beneficiaries of the trust is either a disgruntled second spouse or a demanding child. In such a case, the beneficiary may never be satisfied with what the trustee proposes to distribute. If the goal of the settlor is to discourage unnecessary demands and possible litigation from such beneficiaries, a personal power might be a good way to achieve this result. using a personal power, the settlor is putting the beneficiary on notice of his or her intention that a court not question the trustee’s judgment.
Conclusion
If a settlor wants to literally grant someone almost sole, total, and unbridled authority over a particular power pertaining to a trust, he or she might want to consider designating that power as a personal power. With a personal power a settlor is relying on the personal judgment of the trustee, a judgment that a court cannot question. Assuming the settlor wants to provide his or her trustee the ultimate degree of authority possible, a personal power may be the best choice.
1 Booth v. Krug, 14 N.E.2d 645 (1938); Bogert on Trusts, §553 at 1746.
2 Ingraham v. Ingraham, 48 N.E. 561, 572 (Il. 1897); Young v. Young, 97 N.C. 132 (N.C. 1887).
3 7 6 Am. Jur. 2d 182, Trusts §319.
4 5 6 Fla. Jur. 2d, Trusts §44 at 72.
5 Welch v. Wachovia Bank & Trust Co., 38 S.E. 2d 197, 201 (N.C. 1946); Young v. Young, 97 N.C. 132 (NC, 1887).
6 See Tiernan, A Trustee’s Duties and Responsibilities Under Discretionary Invasion Provisions, 79 Fla. B. J. 50 (October 2005).
7 Flynn v. Danforth, 547 S.W. 2d 132, 136 (Mo. 1977).
8 See Alexander A. Bove, Jr., The Trust Protector: Trust(y) Watchdog or Expensive Exotic Pet?, 30 Estate Planning 390 (August 2003).
9 Fla. Stat. §736.0801.
10 Fla. Stat. §736.0802.
11 Fla. Stat. §736.0803.
12 5 6 Fla. Jur. 2d, §44, at 72.
13 Id. ; 76 Am. Jur. 2d, Trusts §295.
14 See Welch, 38 S.E. 2d at note 5 (N.C. 1946).
15 Young v. Young, 2 S.C. at 80 (N.C. 1887).
16 Stix v. Commr., 152 F.2d 562 (2d Cir. 1945); Hoppe v. Hoppe, 370 So. 2d 374 (Fla. 4th D.C.A. 1978).
17 7 6 Am. Jur. 2d 182, Trusts §319.
18 See Scott, The Law of Trusts, §187.1 (4th ed. 1988).
19 5 5A Fla. Jur. 2d, Trusts, §137 at 354 (emphasis added).
20 Welch, 38 S.E. 2d at 201 (N.C. 1946).
21 Barnett First Nat. Bank v. Cobden, 393 So. 2d 78 (Fla. 5th D.C.A. 1981).
22 French et al. v. Northern Trust Co., 64 N.E. at 108 (Il. 1902).
23 Hurwitz, 21 A.2d at 409 (CT. 1941).
24 Welch v. Wachovia Bank & Trust Co., 38 S.E. 2d 197, 201 (N.C. 1946); Young v. Young, 97 N.C. 132 (NC, 1887).
25 Lorimore v. First Savings Trust Co. of Tampa, 140 So. 891 (1931).
26 Young v. Young, 97 N.C. 32 (NC, 1887).
27 See Fla. Stat. §736.0105(2).
28 Wallace v. Jullier, 3 So. 2d 711 (Fla, 1941); Dunkley v. Peoples Bank & Trust Co., 728 F. Supp, 547 (W.D. Ark. 1989).
29 See Tiernan, A Trustee’s Duties and Responsibilities Under Discretionary Invasion Provisions, 79 Fla. B. J. 50 (October 2005).
30 See In Re Sullivan’s Will, 144 Neb. 36 (1943).
31 5 6 Fla. Jur. 2d, Trusts §44 at 72.
32 Fla. Stat. §736.0801.
33 Strite v. McGiness, 330 F.2d 234, 240 (3d Cir. 1964).
34 Fla. Stat. §737.402(4)(a)1.
35 Young v. Young, 97 N.C. 32 (N.C. 1887); De Lashmutt v. Teetor, 169 S.W. 34 (Mo. 1914); Tilly v. Letcher, 32 So. 527 (Ala. 1919); Luquire v. Lee, 49 S.E. 834 (Ga. 1905).
36 See Mesler v. Holly, 318 So. 2d 330 (Fla 2d D.C.A. 1975).
37 Wallace v. Jullier, 3 So. 2d 711 (Fla, 1941); Dunkley v. Peoples Bank & Trust Co., 728 F. Supp, 547 (W.D. Ark. 1989).
Peter B. Tiernan is a vice president and estate settlement officer of JPMorgan Chase Bank, N.A., in Palm Beach Gardens. He received his J.D. from the University of Florida College of Law and his master’s of law in taxation from the University of Miami School of Law. He is a former chair of the trust and probate section of the Broward County Bar Association.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Melissa Murphy, chair, and Richard R. Gans and William P. Sklar, editors.
