Griff's Notes, April 7, 2022: Residuary Clauses, Powers of Appointment, and Boilerplate: A Bad Combination
Tax, trusts and estates updates from around the country
I have a strong belief and conviction that non-attorneys, online will/trust services, and estate plan review services should never, under any circumstance, analyze or attempt to exercise powers of appointment. Period.
Today’s case strengthens that conviction, because it shows how boilerplate language drafted by an attorney can still create issues with powers of appointment. The outcome is not one I agree with, but it nonetheless illustrates a disturbing trend in the state-by-state analysis of powers of appointment.
This case also illustrates how, as a practitioner, you need to review the residuary clauses in your clients’ wills (whether or not you drafted the clauses) to make sure that an unintended result is avoided.
The following is my analysis of a recent opinion from the Court of Appeals of Washington, In re Berg (April 4, 2022), analyzing the exercise of a power of appointment through a residuary clause.
Facts
The Berg family had a closely-held scaffolding business, which was the subject of this litigation between two siblings. Their parents had started the business, and their parents’ estate plans created two potentially divergent outcomes.
The siblings’ (Randy’s and Kathy’s) father had died first, creating an estate plan which left the father’s business interest to a credit shelter trust and a marital trust for their mother. Each trust contained a limited testamentary power of appointment, exercisable by their mother (as powerholder) in favor of the father’s descendants. The power of appointment contained this language, which is common to many such powers of appointment:
[The powerholder] must expressly refer to and exercise this power in [the powerholder’s] valid Will or codicil for the appointment to be effective.
Before we dive into the power of appointment, the opinion implies (but does not directly state) that the father and mother owned equal or similar interests in the business. The father’s one-half interest was divided between the credit shelter and marital trusts, while the mother was free to dispose of her one-half interest under her estate plan.
This is important, because the takers in default between the two plans differed. The father’s estate plan (at termination of the credit shelter/marital trusts) left the business interest 25% to Randy, and 55% to Kathy. The mother’s revocable trust (as residuary beneficiary of her estate) equalized these ownership percentages, leaving the business interest 55% to Randy and 25% to Kathy. Thus, if the power of appointment over the credit shelter and marital trusts was not effectively exercised, this meant Randy and Kathy would have equal interests. But, if it was effectively exercised, Randy would get 55% and Kathy would get 25%.
The mother’s will contained a residuary clause pouring over her assets to her revocable trust, including:
property over which I may have a power of appointment which I have not otherwise exercised, released or refused in writing, to exercise…
This is commonly known as a “blanket-exercise clause,” as it (attempts to) exercise all powers of appointment held by the testator.
As many seasoned practitioners know, a residuary clause usually expressly states that it does not apply to property subject to a power of appointment (i.e., practitioners usually avoid blanket-exercise clauses). The reason blanket-exercise clauses are usually avoided is because common law usually imposes a “strict compliance” standard, which requires specific reference to a power of appointment if a donor of the power expressly states such a requirement. Arguably, the latter was missing from the mother’s will.
Following their mother’s death, Kathy was named as personal representative of her estate and trustee of her revocable trust. Kathy notified Randy that she would be taking the position that the power of appointment was not effectively exercised by their mother. Randy then petitioned the trial court for a finding that their mother had indeed effectively exercised her power of appointment.
The trial court held a bench trial, considering outside testimony (an issue to be discussed below) regarding the effect of the residuary clause. After weighing the testimony and extrinsic evidence presented, the trial court held that the mother did not manifest her intent to exercise the power of appointment, because the residuary clause was (according to the drafting attorney) boilerplate language that they included in every client’s will. The trial court also concluded that the mother did not include a specific reference to the power of appointment in the credit shelter/marital trusts, and thus could not be an effective exercise of the power of appoinment.
Appeal
Randy sought an appeal, and surprisingly the Court of Appeals reversed the trial court’s holding and deemed the power of appointment to have been effectively exercised.
Generally, extrinsic evidence (as was presented at the trial court level) can only be used to resolve an ambiguity in a testamentary instrument. Absent ambiguity, or absent clear and convincing evidence of a mistake by the testator or scrivener, the Court must look to the four corners of the document. This is commonly known as the “four corners” rule.
The Court concluded that there was no ambiguity when it came to intent to exercise the power of appointment, due to the Court’s conclusion that the express reference requirement in the powers of appointment had been satisfied. Somehow, the Court concluded that simply expressing a blanket intent to exercise all powers of appointment (through a residuary clause) was enough to satisfy the express reference requirement.
Now, before going further, I want to note that Washington recently adopted the Uniform Power of Appointment Act, which took effect on January 1, 2022 (codified at RCW 11.95A.001 to -.903). Although this appeal was issued after this effective date, the Court still considered a prior statute which has now been repealed - RCW 11.95.060.
Notably, the old statute does not require strict compliance, or even substantial compliance, with any formal requirements of exercise imposed by the donor of the power of appointment. Contrast the old statute with Section 304 of the Uniform Power of Appointment Act, RCW 11.95A.230, which expressly condones an exercise which substantially complies with the donor’s requirement of a reference or “specific reference” to a power of appointment.
Once again, we get into semantics, as the powers of appointment in question required “express” reference and not “specific” reference. While this difference was not cited by the Court, and nonetheless was not a Washington requirement at the time (due to the focus solely on the powerholder’s intent), it is easy to see how the Court could interpret “express” reference to be satisfied by a blanket exercise of a power of appointment as opposed to a “specific” reference (which would require citation to the instrument creating the power of appointment, and either a reference to the specific trust to which the power of appointment applies or the page, section, paragraph, and/or article number of the clause containing the power of appointment). The Court said as much, although with few words, in stating:
It did not require [the powerholder's] will to specifically refer to [the donor's] will.
Interestingly, the old Washington statute generally disregarded a donor’s formal requirements of exercise, and instead focused solely on the intent of the powerholder. And, the statute went on to state a negative, as follows:
A testamentary residuary clause which does not manifest an intent to exercise a power is not deemed the exercise of a testamentary power.
The natural offshoot of the “four corners” rule under common law is that a testator’s intent is to be gleaned from the “four corners” of the document as well. Thus, if intent was all the Court had to concern itself with, it is easy to see why the Court reached this conclusion.
Takeaways
Before sounding the alarm bell, I want to note that this opinion may be partially superseded by Washington’s adoption of the Uniform Power of Appointment Act (the “Act”). Generally, the Act discourages (but does not prohibit) blanket-exercise clauses, as you may find in a residuary clause such as the one above, as such clauses generally do not meet a donor-imposed specific reference requirement (see Comments to Section 301 of the Act).
But, the Court did fall short (in my opinion) by failing to distinguish between “express” reference (as required under the powers of appointment in question) and “specific” reference (as required under the Act).
Now, residuary clauses without reference to powers of appointment are likely safe under the Act. Section 302 of the Act generally provides that a residuary clause without a blanket-exercise clause only exercises a testamentary general power of appointment which can be exercised in favor of the powerholder’s estate, and even then the exercise is only effective in the rare event that there are no takers in default.
Nonetheless, careful drafting is and continues to be prudent. This case provides two key warnings:
Be careful when drafting residuary clauses, and consider omitting any blanket-exercise clause as the default language (especially where family business interests are involved, or where the assets subject to the power of appointment will not be distributed in a way that differs from distribution to the takers in default).
Remember that every term and provision of the document, even the boilerplate, will be interpreted to be the intent of the settlor or testator if the four corners rule applies. This is the case regardless of whether the settlor or testator consciously chose to include such a term and provision as an expression of intent. This can be especially dangerous in today’s time-crunched schedules, where clients delegate their intent to estate planners with statements such as, “Just tell me what you think I should do.”
There is much more to be said about this case, but doing so warrants a much deeper discussion of strict compliance versus substantial compliance with donor-imposed requirements under a power of appointment and potential conflicts of laws between states. I plan to bring you this type of analysis in the future, but for the time being you may want to review my prior comments on pitfalls surrounding powers of appointment in a revocable trust.