Power of Appointment
What is Power of Appointment?
Power of appointment allows the trustee to dispose of the property in favour of the object of that power. For example, if X leave his friend Y all his money to be distributed among all his children and up to £5 to the RSPCA. This means the trustee has a power to leave £5 to the RSPCA, but the important thing about the power is the trustee is not obliged to do it. The trustee has discretion not only as to how to distribute the property (how much of £5), but also as to whether to distribute the property at all (whether the RSPCA should get anything at all).
Thus there are three trust arrangements:
Fixed trust, is a mandatory trust, trustee should follow the trust instrument.
Discretionary trust is a mandatory trust but the trustees have discretion as to how to exercise his duty.
Powers of appointment trust, the trustee does not have to exercise his power.
Power or discretionary trust
The distinction between these powers is important. For example, if a case arises where the instrument stated the trustees may exercise discretion to divide my money among my children. The answer is not entirely clear from that wording. If they don’t have to pay the children, it is a power. But it could be a discretionary trust where the money has to be paid; the trustee will have to make the distribution, although the trustees have discretion as to the division of property among the three children.
A power does not necessarily have to be exercised by a trustee. For example, X may leave all of his money to Joe on trust to be distributed equally among his 3 children, subject to the power that my wife can appoint up to £10,000 to the RSPCA. In this situation the power is not exercised by a trustee, this is a possible arrangement. In this type of circumstances, the person exercising the power is called the donee. The donee of the power is usually the trustee then he has certain responsibilities on how to exercise the power, if he is not a donee then these responsibilities are not inherent.
How to categorise powers of appointment
There are several ways to categorise powers.
The first distinction depends on the person that exercises the power.
Fiduciary Power – whether the power is exercised by a trustee (solicitor; agent etc.)
Personal Power – whether the power is exercised by someone else who is not a trustee, called donee.
The nature of the power dictates the obligations that the person with that power owes. Example of Fiduciary power:
General Principle: The obligation deriving from fiduciary powers is set out by the court in the following case.
Re Hay’s Settlement Trust [1981] 3 All ER 786
Facts: In the case the trustee was directed to hold the trust fund appointing anyone except the settlor, the settlor’s husband and the trustee himself. The issue was related with the validity with that power. Ratio: The House of Lords set out the three main steps in which a fiduciary power must be exercised: (i) The trustee has a choice to exercise or not. The trustee must periodically consider whether to exercise the power received or not. (ii) Because of the responsibilities a trustee has, he has to act responsibly, properly considering the size of the class entitled to benefit, carefully analysing the range of the objects. (iii) He has to appoint appropriate individuals to benefit, deserving individuals. Application: The court held that the power was valid. The trustee was under a duty to ensure that any appointment was within the power and to periodically consider exercising it. The power could not have been delegated.
The second way to categorise powers is based on the person that benefits from it.
General power – when the power is choosing from anyone in the world
Special power – power to choose from a defined class of individuals
Hybrid power – anyone, except a defined class of individuals (as in the case of Re Hay’s ST)
LAW BOOKS
Use our law textbooks from the Core Series, which were compiled by law Tutor, who has worked as both a law lecture and a barrister and read more about Power of Appointment. The books in our Q&A Series will help you prepare questions on Power of Appointment for examinations more easily.
