The constructive general inter vivos power of appointment: A trap for the unwary trustee and his counsel

Charles E. Rounds, Jr. - Suffolk University Law School
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The constructive general inter vivos power of appointment is the product of the marriage of power of appointment doctrine and creditors’ rights doctrine. It is a topic that is taken up in §4.1.3 of Loring and Rounds: A Trustee’s Handbook (2013), at pages 263-265. See also §5.3.3.1. The classic definition of a general inter vivos power of appointment (which is tantamount to a power of revocation) is the power to appoint property to oneself or one’s creditors. Absent a statute to the contrary, it is now generally the case in the U.S. that a settlor cannot place property in trust for the settlor’s own benefit and keep it and/or the equitable interest beyond the reach of the settlor’s creditors. The maximum amount which could be expended by the trustee for the settlor’s benefit is vulnerable to creditor attack. Thus, property that is subject to an ostensibly irrevocable fully-discretionary trust (that is discretionary as to both income and principal) for the benefit of the settlor is fully vulnerable to attack by the settlor’s creditors. That being the case, the settlor constructively has a power, bestowed by operation of law, to appoint the property to his creditors. The power is exercisable by racking up debts. This power of revocation exists even if the terms of the trust expressly provide otherwise. The landmark case of Ware v. Gulda, 331 Mass. 68, 117 N.E.2d 137 (1954), stands for that proposition. The trust restatements are in accord. It was not long after Ware came down that the light bulbs went on in the offices of the IRS. The ensuing tax cases are cited in the footnotes to §4.1.3 of the Handbook. The section is reproduced in its entirety below.

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