Powers of Appointment and Disinheritance: A Vicious Combination

Examining In re Dec. 23, 2002 Restatement of the Vivian Stolaruk Living Trust

“Petitioners allege that Giarmarco prepared flow charts that showed them how the [marital and family trust] assets would be distributed after Steve's death, but did not indicate that Steve could exercise his [limited power of appointment] to disinherit them. Petitioners allege that they relied on the flow charts and did not further investigate the extent of Steve's power under the [limited power of appointment].”

Sullivan v. Giarmarco (In re Dec. 23, 2002 Restatement of the Vivian Stolaruk Living Tr.), 361518, 365004 (Mich. App. Apr 04, 2024).

Background

Before even getting into the substance of this case, this opening quote should scare you – especially if you spend a lot of money on estate planning software that purports to “summarize” existing documents using visual flowcharts or AI-generated summaries.  You never know who is relying on your deliverables, even if the estate planning documents clearly override the summary.  Being right doesn’t matter if it takes litigation to prove you are right. 

That being said, I have two odd areas of affinity in the areas of trusts and estates.  One is the interpretation of no-contest clauses.  The other is the exercise of powers of appointment. 

Cases can be won and lost on powers of appointment.  I have helped estate disputes reach settlement by examining the exercise of powers of appointment.  Often, powers of appointment do not carry with them fiduciary duties unless the power holder is also a trustee.  But, they are often limited with respect to the class of appointees. 

Perhaps the biggest faux paus in exercising a limited power of appointment is exercising it in favor of the holder’s revocable trust, with no other restrictions or limitations.  Why?  Because creditors of the estate can often recover from a revocable trust.  So, unless (1) creditors are permissible appointees (which is only the case for a general, and not a limited, power of appointment) or (2) the instrument of exercise has express conditions limiting recipients under the holder’s revocable trust to permissible appointees, then the exercise may not be valid unless equitable remedies such as selective allocation may apply.  And, these equitable remedies are not available in all states – the default has traditionally been that powers of appointment, and the exercise thereof, are strictly interpreted and enforced. 

It is from this framework that the recent Michigan Court of Appeals decision in Sullivan v. Giarmarco (In re Dec. 23, 2002 Restatement of the Vivian Stolaruk Living Trust) is presented.  This case, while pro-drafter, should still give pause to anyone creating, exercising, or even illustrating trusts subject to powers of appointment. 

Facts

Attorney (and later successor trustee) Giarmarco drafted a restatement of revocable trust for Vivian Stolaruk in 2002, creating a marital trust and family trust for her surviving spouse, Steve Stolaruk.  Steve was granted a limited, exclusionary power of appointment over each such trust in favor of Vivian’s descendants, their spouses, and charities.  To the extent this power was not exercised, the children of Vivian and Steve were to each receive a certain pecuniary amount from the combined remainders of Vivian’s marital and family trusts. 

Vivian died in 2003, at which point these trusts were funded.  Steve later amended his trust in 2017 to exercise this limited power of appointment completely in favor of Giarmarco as trustee of Steve’s revocable trust, with the condition that Giarmarco should then further appoint such assets to St. Joseph Mercy Oakland Hospital (subject to the naming a patient tower after Steve and Vivian).  Steve then died in 2018, at which point Steve’s and Vivian’s children were completely disinherited by Steve’s exercise of the limited power of appointment (as Steve’s trust only included charities as beneficiaries). 

The children petitioned for reformatting, alleging that Vivian did not intend for them to be disinherited by their father’s exercise of a special power of appointment.  Summary judgment was granted to Giarmarco as trustee at the trial court level based on unreasonable delay, laches, and unfair prejudice to Steve’s trust.  After a remand due to discovery disputes and another summary judgment in favor of Giarmarco, the children appealed.    

Delay and Laches

One issue on appeal was when the children’s cause of action accrued.  Was it in (1) 2002 when Vivian’s trust was restated to include the limited power of appointment, (2) 2003 when Vivian died and her trust became irrevocable, (3) in 2017 when Steve exercised the power of appointment, or (4) 2018 when Steve died? 

The Court determined that the true “harm” accrued in 2003 upon Vivian’s death, as this was when Steve irrevocable acquired the power to disinherit the children.  As a result, the 2019 petition was untimely. 

(Note that discovery matters.  Presumably, based on the quote above, the children received a summary of the trust at some point before Steve’s death, but they note that they relied on the summary without reviewing a copy of the trust itself.  Courts in other states have determined that the harm of disinheritance accrues from the time of actual receipt of a copy of the revocable trust during the settlor’s life, which is when the harm is discovered.  In this case, while not analyzed in light of the ability to discover the harm, the children acknowledge that they had the prior opportunity to review Vivian’s trust but did not do so.) 

Exercise of POA

After some wrangling about discovery orders at the probate court level, attention was turned to the manner of exercise of the limited power of appointment.

Under a strict compliance standard, as noted above, a power holder’s revocable trust may not be a permissible appointee due to the presence of estate creditors as a potential claimant of appointed property under the revocable trust.  This has the general effect of converting a limited power of appointment into a general power of appointment, which (if not an impermissible exercise) can be a bad outcome both for tax and non-tax reasons. 

This is what the children argued in this case – that Steve’s revocable trust (or the trustee thereof) was not a permissible appointee.  The problem for them, however, was two-fold. 

One, there was limiting language in the clause of Steve’s revocable trust exercising the limited power of appointment.  This limiting language provided, in part, that the appointed property of the marital trust and family trust:

"…shall not be an asset of Grantor's probate estate, or . . . be treated for any other purpose as if it were an asset of Grantor's probate estate."

Two, while this issue has not been litigated in many states, Michigan just happened to be a state where this was not an issue of first impression.  The Court had previously published an opinion, In re Estate of Reisman, 702 N.W.2d 658 (2005), which determined that language sufficiently limiting appointed assets under a revocable trust to exclude the probate estate as a claimant was sufficient to prevent the estate from becoming an impermissible appointee under these circumstances.  In other words, while a bare exercise of a power of appointment in favor of a revocable trust could run afoul of the limitation on appointees, exclusions of recipients and/or specific articles (of the revocable trust) for such recipients in the exercise of the power of appointment was enough to prevent this outcome. 

The Court agreed with their holding in Reisman, noting that the restrictions on the power of appointment to direct appointed assets solely to St. Joseph Mercy Oakland Hospital was sufficient to keep claims against Steve’s estate, or expenses of administering Steve’s revocable trust, from being satisfied from such appointed assets.  While there was language of his trust suggesting that Steve’s actual bequest to St. Joseph Mercy Oakland Hospital from his own assets could be reduced by claims and administrative expenses, the Court implied that the provision exercising the limited power of appointment was specific enough to supersede that general term (notwithstanding the fact that the two terms applied to different sets of assets). 

Key Takeaways

As I do each time a power of appointment case comes down the pike (and although this was not the case here), I will again harp on the point that no AI or automated document provider can safely exercise a power of appointment.  In an environment where significant inherited wealth will pass to trusts with powers of appointment, this creates limited utility for non-attorney drafting tools in the future. 

That being said, I remember as an associate sometimes spending more time on a 10-page written estate plan summary than I did on the documents themselves.  Nevertheless, what stood out in my mind was a line in the summary that stated, “In the event of a conflict or inconsistency between this summary and the documents, the terms of the documents control.” 

I don’t know if the summary upon which the children relied in this case contained such limiting language, and it may not have had any utility even if included.  But, many software providers create estate plan flowcharts with an emphasis on the numbers and funding.  Few, if any, expand on distribution terms and powers of appointment.  (It’s not hard to do, as I illustrate in this video):

That being said, just including powers of appointment in the summary is not even enough.  There is rarely an acknowledgement that the power of appointment will reduce what the takers in default receive.  This is easily assumed by attorneys, but a lay audience often fails to realize this.  And while a drafting attorney typically owes no duty to such takers in default to plainly express this possibility while parents are living, this changes when a parent dies.  The question, as I alluded to above, becomes one of discovery.

In this vein, powers of appointment can be cold and cruel in their application.  They do allow complete disinheritance, coupled with possible elimination of fiduciary duties.  For now, the onus is on the beneficiary to discover and know this possibility of disinheritance - dependent on access to sufficient information to make such discovery.  (And, as I will discuss in a later article about the Balanson line of cases in Colorado, this possibility of disinheritance may not even matter when examining whether a vested remainder in a trust is treated as property subject to division in divorce.) 

So, if there is a lesson to be learned here, it is the continued admonition that doing everything right still may not keep you out of court.  I see no missteps on the part of the drafting attorney/trustee here, other than perhaps taking for granted that beneficiaries may have relied upon the attorney’s representations in lieu of conducting their own personal investigation.  But, I always favor the open book approach and recommend over-disclosure in the absence of a compelling reason to withhold information.