The liability of a trustee who honors a fraudulent exercise of a power of appointment

Charles E. Rounds, Jr.
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A trustee who transfers trust property to a permissible appointee for the benefit of an impermissible appointee such that the fraud on a special power doctrine is implicated incurs no liability as a consequence, unless the trustee knew or should have known of the donee’s (powerholder’s) fraud. If the trustee knew or had reason to know of the donee’s fraud, then the transfer would constitute a breach of trust. In the case of a breach of trust, the person entitled to the appointive assets may seek recovery from the trustee personally, as well as from the impermissible appointee who has been unjustly enriched. Otherwise, the trustee would still have an obligation upon learning of the fraud to notify the persons entitled to the appointive assets of their rights and to initiate action against the mistaken payee to recover the wrongfully dispensed assets. When there is reasonable doubt as to whether there actually has been a fraud perpetrated on the special power, the trustee should petition the court for instructions and/or declaratory judgment. The fraud on a special power doctrine is covered generally in §8.15.26 of Loring and Rounds: A Trustee’s Handbook. The section is reproduced in its entirety below.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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