1. Introduction
In a recent blog post I mentioned the topic of abatement in passing. In this post I want to address the topic in greater detail, with specific reference to property that is the subject matter of a general power of appointment. However, in the process I shall explore the nature of a general power of appointment and the reason why the property that is subject to it is not always sacrosanct.
Before any beneficiary becomes entitled to property the testator has given to him, the debts must first be paid.[1] In this context, “debts” includes the debts and liabilities of the testator, as well as funeral, testamentary, and administration expenses.[2] If the estate is insolvent, the creditors are entitled to the whole estate, according to their priority or preference. The general creditors come last and take a pro rata share of what is left.[3]
The doctrine of abatement concerns the order in which testamentary gifts are reduced if the assets of the estate are insufficient, after the debts have been paid, to pay the gifts in full. That order depends to a large extent on how the gifts are classified, although the testator can change the order in her will.
Testamentary gifts are classified as specific, demonstrative, general, or residuary. A specific gift is a gift of identifiable property or object that the testator has described with sufficient particularity to distinguish it from the general estate. It should be distinguished from general and residuary gifts. A general gift is one that is payable out of the general funds of the estate. A residuary gift, of course, is a gift of all or part of the assets that the testator has not otherwise disposed of. Specific gifts are accorded priority over other gifts in the payment of debts, but they can abate (i.e., be reduced) once the other gifts have been exhausted to pay debts. They can also abate among themselves if payable out of a specific fund that is insufficient to pay them all in full.[4] One drawback of specific gifts is that they can adeem. That happens when the subject matter of the specific gift no longer exists when the testator dies, because he has disposed of it, or it has been destroyed. The beneficiary then receives nothing. Another type of gift is the demonstrative gift, which is a gift directed to be satisfied primarily (as distinct from exclusively) out of a particular fund or asset. Such a gift is treated as a specific gift in the sense that it does not abate if the fund out of which it is to be paid is sufficient to satisfy it, until the estate out of which the general legacies are to be paid is exhausted by the payment of debts. However, if the source out of which the demonstrative gift is to be paid no longer exists, the gift does not adeem, but is treated as a general legacy.
2. Abatement at Common Law
At common law a gift of land was always treated as a specific gift, even if it was included in the residue of the estate. Thus, the common law order of abatement for testamentary gifts was: (1) residuary personalty; (2) residuary realty; (3) general legacies, including pecuniary legacies from residue; (4) demonstrative legacies; (5) specific bequests of personalty; and (6) specific devises of real property.[5]
However, this order has been changed, at least in part, in most jurisdictions. Thus, for example, s. 5 of Ontario’s Estates Administration Act[6] provides:
- Subject to section 32 of the Succession Law Reform Act,[7] the real and personal property of a deceased person comprised in a residuary devise or bequest, except so far as a contrary intention appears from the person’s will or any codicil thereto, is applicable rateably, according to their respective values, to the payment of his or her debts, funeral and testamentary expenses and the cost and expenses of administration.[8]
Some jurisdictions have gone considerably further. Thus, s. 50 of the new British Columbia Wills, Estates and Succession Act[9] provides:
50. (1) This section is subject to a contrary intention appearing in a will.
(2) If a will-maker’s estate is not sufficient to satisfy all debts and gifts, the debts and gifts must be satisfied or reduced in accordance with this section.
(3) Land charged by the will-maker with payment of debts or pecuniary gifts, or both, is primarily liable for the debts and gifts, despite a failure of the will-maker to expressly exonerate the personal property.
(4) Land and personal property must be reduced together.
(5) Subject to subsection (3), assets are reduced in the following order:
(a) property specifically charged with a debt or left on trust to pay a debt;
(b) property distributed as an intestate estate and residue;
(c) general, demonstrative and pecuniary legacies;
(d) specific legacies;
(e) property over which the will-maker had a general power of appointment.
At first blush, s. 50(5)(e) of the British Columbia Act may seem strange. Why should property over which the will-maker had general power of appointment be included in this list? It is not the property of the testator, is it? That is the question I wish to examine in this post. Having done so, I shall then return to the question why property over which the testator had a general power of appointment is made available to the testator’s creditors.
3. Nature of a General Power of Appointment[10]
A power of appointment is the authority given by one person to another to appoint (i.e., to select) the person or persons who are to receive the property that is the subject matter of the power. The power is created by the owner of the property, who is called the donor of the power. The person to whom the power is granted is called the donee of the power, or the appointor, and the persons to whom the donee may appoint are the objects of the power, or when selected by the donee, the appointees. Thus, it is apparent that the donee is not the owner of the property; the donor is and the objects may become the owners. Depending upon the terms of the power, it may be exercised either by deed or by will.
There are three types of powers: general, special, and hybrid. In this blog post I am concerned only with general powers.[11] The donee of a general power, unless she is a fiduciary, may appoint to anyone. She may even appoint to herself, unless the power is exercisable only by will. It is this characteristic of general powers that has caused problems. Many writers have said: if the donee can appoint to himself, then he is effectively the owner of the property, and a general power is “the equivalent of,” or is “tantamount to ownership.”[12] Or, as Lord St. Leonards said: “To make a distinction between a general power and a limitation in fee is to grasp at a shadow while the substance escapes.”[13] Some cases use similar language. Thus, in Pearson v. Pearson[14] the court said: “The donee is for all practical purposes in the position of a beneficial owner of the property.”
But if this were true why are the modifiers: equivalent, tantamount, practical purposes, etc. necessary? Those modifiers necessarily confirm that a general power of appointment is not property. If it were, the writers could have dispensed with the modifiers.
In fact, many cases recognize this. Thus, for example, in Fleming v. Buchanan[15] Turner L.J. noted that while property over which a testator has a general power of appointment is liable for his debts, “such property is not the personal or real estate of the testator.” So also, in Re Fasken,[16] Gale J. said, citing Fry L.J. in Ex p. Gilchrist, Re Armstrong,[17] “It is true that the creation of a power over property does not actually vest the property in the donee.” Indeed, the law is clear that when the donee appoints the property by deed to another person, or by will, the title shifts from the donor to the appointee and does not pass through the estate of the donee. Thus, it is the donor who gives the property, not the donee.[18] There is a further aspect to this as well. Often a general power of appointment contains a gift over to other persons who take in default of appointment. In law the property is vested in the other persons, subject to partial or complete divestment if, when, and to the extent the power is exercised by the donee.[19]
This position was also recognized forcefully by the Supreme Court of Canada. In Wanklyn v. M.N.R.,[20] Estey J. noted:
The giving of a general power of appointment at common law did not of itself constitute a disposition of property.
A Common Law Power enables the donee to pass the legal estate; but it is the execution, not the creation of the power, which effects the transmutation of estate. The legal estate before the execution remains in the creator of the power, or his grantee, or heir-at-law, as the case may be.[21]
When the donee exercised the power the beneficiaries took by virtue of the instrument creating the power, but not by virtue of the exercise thereof.[22]
Thus, the property interest is transferred only when the donee exercises the power.[23]
4. But it is Sometimes Treated as Property
Although I have established that a general power of attorney is not the same as property, it is undeniable that some cases and statutes treat it as property and they do so for good reason. Note carefully what the previous sentence means: A person may say: I know that a general power of attorney does not equal property, but in this particular situation I don’t care about that. I’m going to treat it as if it were. And I have a good reason for doing that.
To determine whether a general power should be treated as property, we need to have regard to what the law is trying to achieve in the circumstances. As the Privy Council said in Tasarruf Medvuati Sigorta Fonu v. Merril Lynch Bank and Trust Company,[24] context is all important. What follows is a list of circumstances in which a general power of attorney has been, or may be treated as property.
4.1 Payment of Debts
Tasarruf Medvuati Sigorta Fonu, the applicant and appellant in the case just mentioned, had been created by the Turkish state to restructure certain failed banks. In the process of doing that, it discovered that the former controller of one of the failed banks and his family and associates had misappropriated a lot of money. He had established two discretionary trusts in the Cayman Islands. He and his wife were the main beneficiaries of the trusts, but he also had a power to revoke them. Thus, he could revest the trust property in himself. Tasarruf sought the appointment of a receiver by way of equitable execution, so as to be able to have the trusts revoked and gain access to the funds. The controller defended on the ground, inter alia, that a power of appointment is not property. However, the Board held that “the powers of revocation are such that in equity, in the circumstances of a case such as this, [the controller] can be regarded as having rights tantamount to ownership.”[25]
This brings us back to the question why the property that is the subject matter of a general power of appointment held by a testator can be used, if necessary, to satisfy the testator’s debts. The origin of this principle is equity. Equity has always had a tender regard for the rights of creditors and so it developed the principle:[26]
that property, real or personal, comprised in a general power of appointment exercised by will, or by a deed not operating to transfer the property to the appointee during the lifetime of the appointor, was available, in default of other assets, for the payment of the appointor’s debts.[27]
The substance of this principle has been codified and carried forward into modern estate administration statutes, such as s. 50(5)(e) of the British Columbia Wills, Estates and Succession Act, reproduced above.[28] Section 54 of the Ontario Trustee Act[29] contains an older codification of the principle. It provides:
54. Property over which a deceased person had a general power of appointment, which he or she might have exercised for his or her own benefit without the assent of any other person, shall be assets for the payment of his or her debts where the same is appointed by will, and, under an execution against the personal representatives of such deceased person, such assets may be seized and sold after the deceased person’s own property has been exhausted.[30]
You should note that this section and the other modern statutes do not speak of a general power of appointment exercised by deed that takes effect after the donee’s death. However, as Timothy Youdan noted in a paper entitled “Powers of Appointment,”[31] presumably the equitable principle continues to apply to such a power. He also noted that, by virtue of s. 2(2) of the Estates Administration Act,[32] s. 2(1) has the effect of vesting the property that is subject to a general power of appointment exercised by will in the deceased appointor’s personal representative. He wondered whether s. 2(1) had the effect of making such property available for the payment of the appointor’s debts, or whether s. 54 of the Trustee Act would take priority and make such property available only after the appointor’s own property has been exhausted. Since s. 54 is more specific legislation I would suggest that it takes priority. Statutes in other provinces contain legislation similar to s. 2(1) of the Estates Administration Act.[33] The running head of s. 50(5) of the British Columbia Wills, Estates and Succession Act[34] makes it clear the assets subject to a general power of appointment are the last to abate.
You should also note that s. 67(1) of the Bankruptcy and Insolvency Act,[35] provides:
(1) The property of a bankrupt divisible among his creditors . . .
. . . shall comprise . . .
(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.
Hence, this legislation also favours creditors for valid reasons.
4.2 Perpetuities
The rule against perpetuities applies to all powers of appointment, both at common law and under modern perpetuities legislation and treats general powers as the equivalent of property. A general power was valid at common law so long as it was given within the perpetuity period. Further, for general powers, the perpetuity period began to run from the date of the appointment.[36]
Under perpetuities statutes, a general power that would have been void at common law because it could have been exercised beyond the perpetuity period, is presumptively valid until actual events establish that it cannot be exercised within the period. Further, the legislation treats a power as general if it is exercisable by one person only and can at all times be exercised by that person to transfer the whole of the property under the power to herself without the consent of any other person, or compliance with any other condition.[37]
4.3 Tax Purposes
It is possible that fiscal legislation could treat general powers of attorney as the equivalent of property.[38] For example, formerly, a transfer of property over which a deceased person held a general power of appointment could not be registered under the Registry Act,[39] until the Minister of Finance had consented to the transfer. The issue of whether general powers of appointment should be treated as property for income tax purposes is too complex to discuss in a blog post, but it was discussed at some length by Youdan in his paper and I refer the reader to it.[40]
4.4 Family Property Legislation
Under modern family property statutes, a spouse is entitled to share in family assets or to an equalizing payment of the spouses’ net family properties on a breakdown of marriage. Many of the statutes[41] also extend this right to the surviving spouse. The statutes define property and may include property over which a spouse holds a general power of appointment. Thus, for example, s. 4(1) of the Ontario Act[42] contains the following definition:
“property” means any interest, present or future, vested or contingent, in real or personal property and includes,
(a) property over which a spouse has, alone or in conjunction with another person, a power of appointment exercisable in favour of himself or herself.
The comparable New Zealand legislation, the Property (Relationships) Act, [43] contains a provision that is worded somewhat differently. Section 2(e) defines “property” to include the typical types of property, as well as “any other right or interest.” The New Zealand Supreme Court had to consider its meaning in Clayton v. Clayton.[44] The case dealt with a number of issues, but I shall focus solely on the meaning of this definition. Mark and Melanie Clayton married when Mark was just establishing his business. She signed a marriage agreement by which she opted out of her rights under the statute and the agreement made other provision for her if the marriage should fail. The business was an international success and was controlled by a trust.
The parties eventually separated and Melanie applied successfully to set aside the marriage agreement. Then she applied to set aside the trust. Mark was the settlor and sole trustee. The trust had a number of discretionary beneficiaries, including Mark and Melanie. The couple’s two daughters were the “Final Beneficiaries.” Mark had the right to appoint or remove discretionary beneficiaries.
The New Zealand Court of Appeal had held that this power allowed him to make himself the sole discretionary beneficiary.[45] The Supreme Court stated that if that decision was correct Mark would have a power tantamount to ownership of the trust property. However, it agreed that Mark could not remove his daughters as final beneficiaries. Consequently, the power was not the equivalent of ownership. But that was not the end of the matter for, as the Supreme Court noted, Mark could either: (a) appoint all income or capital or both to himself, without breaching any fiduciary duty to his daughters; or (b) resettle the trust property on a new trust of which he was the sole beneficiary, also without breaching any fiduciary duty.[46] That made the power Mark held a general power of appointment, because he could appoint the property to himself. And that being so, his powers were “any other right or interest” within the meaning of the statutory definition.
It is significant that the New Zealand Supreme Court expressed the opinion that the definition had to be interpreted within its statutory context and having regard to the fact that the statute is social remedial legislation. Thus, it concluded that “strict concepts of property law may not be appropriate in a relationship property context.”[47] It followed that Mark’s powers were property and the trust assets could be reached by Melanie.
Joel Nitikman commented on both the Court of Appeal decision[48] and on the Supreme Court decision.[49] With respect, I think he is right that both courts should not have treated a general power of appointment as property, or as “tantamount to” property.[50] I think he is also right in concluding that a court can legitimately hold, when interpreting a statutory definition of “property” within in the context of the statute and its purpose, that the definition can include the property subject to a general power of appointment.[51]
5. Conclusion
In summary:
(1) It is incorrect, because illogical, to describe a general power of appointment as tantamount or equivalent to property.
(2) However, depending upon the context in which the issue arises, including statutory definitions of “property,” the property that is subject to a general power of appointment may be made available to pay creditors, pay taxes, satisfy family property obligations, or possibly for other reasons. A general power of appointment is also specifically defined and treated as property for perpetuity purposes.
(3) The property that is subject to a general power of appointment may be reached to pay the debts of a testator, but only if the testator’
—-
[1] See Estates Administration Act, R.S.O. 1990, c. E.22, 2(1).
[2] Lecky Estate v. Lecky, 2011 ABQB 802, 72 E.T.R. (3d) 263.
[3] Cf. Trustee Act, R.S.O. 1990, c. T.23, s. 50(1).
[4] Culbertson v. Culbertson (1967), 62 D.L.R. (2d) 134 (Sask. C.A.).
[5] See Celentano Estate v. Ross, 2014 BCSC 27, 96 E.T.R. (3d) 265, para. 13. And see Theobald on Wills, 18th ed. by John G. Ross Martyn, Jane Evans-Gordon, Alexander Learmonth, Charlotte Ford, and Thomas Fletcher (London: Thomson Reuters/ Sweet & Maxwell, 2016, §32-013.
[6] R.S.O. 1990, c. E.22.
[7] R.S.O. 1990, c. S.26.
[8] Section 32 of the Succession Law Reform Act, ibid., provides that, absent a contrary intention, an interest in real or personal property that is subject to a mortgage is primarily liable to payment of that encumbrance.
[9] S.B.C. 2009, c. 13.
[10] I am indebted to Joel Nitikman of Dentons Canada, Vancouver, who initially sought my views on this topic, though in a slightly different context, and who later kindly shared some of his research.
[11] For a more detailed description of powers, see Oosterhoff on Trusts: Text, Commentary and Materials, 8th ed. by A.H. Oosterhoff, Robert Chambers, and Mitchell McInnes (Toronto: Thomson Reuters/Carswell, 2014), §3.6.
[12] Waters’ Law of Trusts in Canada, 4th ed. by Donovan W.M. Waters, Mark Gillen, and Lionel Smith (Toronto: Thomson Reuters/Carswell, 2012), p. 97
[13] Edward Sugden, A Practical Treatise on Powers, 8th ed. (1861), p. 396.
[14] 2012 BCSC 1262, at para. 84.
[15] (1853), 3 De G.M. & G. 976 at 979, 43 E.R. 382.
[16] [1961] O.R. 891, 30 D.L.R. (2d) 193 (H.C.) at para. 20.
[17] (1886), 17 Q.B.D. 521 at 531 (C.A.). This quotation from Gilchrist is quoted also in Montreal Trust Co. v. M.N.R., 60 D.T.C. 1183 (Ex. Ct.); Carter v. Congram, 1969 CarswellOnt 326 (H.C.) at para 20; Mordo v. Nitting, 2006 BCSC 1761 at paras. 362-363; Kennon v. Spry, [2008] HCA 56 at para. 176.
[18] See Sugden, A Practical Treatise on Powers, 8th ed. (1861), p. 470. And see ibid. p. 396.
[19] See Farwell on Powers, 3d ed., 1916, p. 310; Re Creighton, 1950 CarswellMan 59 (K.B.) at para. 35; Wanklyn v. M.N.R., [1953] 2 S.C.R. 58 at 75, per Cartwright J.
[20] [1953] 2 S.C.R. 58 at 63.
[21] Farwell on Powers, 3rd ed., p. 2.
[22] Attorney-General v. Parker, (1898) 31 N.S.R. 202 (C.A.); Re Lovelace, 4 De G & J. 340.
[23] See Carter v. Congram, 1969 CarswellOnt 326 (H.C.), para. 20; Mordo v. Nitting, 2006 BCSC 1761, paras. 361-363, in the last para. of which the court states that the object of the power, who was able to recall property that was vested in a trustee, “had no equitable interest at all until she exercised her power of appointment.”
[24] [2011] UKPC 17, para. 33.
[25] Ibid.
[26] Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, 20th ed. by John Ross Martyn and Nicholas Caddick (London: Thomson Reuters/Sweet & Maxwell, 2013), §49-14.
[27] See O’Grady v. Wilmot, [1916] 2 A.C. 231 at 248, per Lord Buckmaster.
[28] See text at footnote 9, supra. See also the Estate Administration Act, S.A. 2014, c. E-12.5, s. 28(1)(e); Administration of Estates Act 1925 (Eng.), 1925, c. 23, s. 32(1); Sched. I, Part II.
[29] Footnote 3, supra.
[30] See also, to the same effect, Execution Act, R.S.O. 1990, c. E.24, s. 29(2). And see also Succession Law Reform Act, R.S.O. 1990, c. S.26, s. 32(1).
[31] Presented at the Law Society of Upper Canada, “11th Annual Estates and Trusts Summit”, 19 November 2008, and available online at: https://www.google.ca/#q=Youdan,+Powers+of+Appointment&gws_rd=cr, at pp. 21-22.
[32] Footnote 1, supra.
[33] For the comparable legislation, see Oosterhoff on Wills, 8th ed. by Albert H. Oosterhoff, C. David Freedman, Mitchell McInnes, and Adam Parachin (Toronto: Thomson Reuters/Carswell, 2016), §3.2.
[34] See text at footnote 9, supra.
[35] R.S.C. 1985, c. B-3.
[36] See Oosterhoff on Wills, footnote 33, supra, §19.5.3(b)
[37] See ibid., §19.6.6(a). And see, e.g., Perpetuities Act, R.S.O. 1990, c. P.9, ss. 4(2), 11.
[38] See, e.g., Re O’Grady; O’Grady v. Wilmot, [1916-17] All E.R. Rep. Ext, 1385; Melville v. I.R.C., [2001] EWCA Civ 1247, [2002] 1 S.L.R. 407.
[39] R.S.O. 1990, c. R.20, s. 53(3)(b), (8).
[40] Footnote 31, supra, pp. 22ff.
[41] Such as Ontario’s Family Law Act, R.S.O. 1990, c. F.3, s. 5(2).
[42] Ibid.
[43] Property (Relationships) Act 1976 NZ, 1976, No. 166.
[44] [2016] NZSC 29. Kennon v. Spry, footnote 17, supra, was also a matrimonial property case in which property was held in a discretionary trust. The New Zealand Supreme Court followed it in Clayton.
[45] [2015] NZCA 30.
[46] There would not be a breach of fiduciary duty, because the trust gave these powers to Mark expressly.
[47] Clayton, footnote 44, supra, para. 79.
[48] Joel Nitikman, “Sham, Illusion and All that Jazz: A Case Comment on Clayton v. Clayton” (2016), 35 E.T.P.J. 146.
[49] Joel Nitikman, “Clayton v. Clayton in the New Zealand Supreme Court: It’s Hard to Keep a Good Court Down” (2016), 35 E.T.P.J. 333.
[50] Ibid., pp. 335, 336, 337, 341-42.
[51] Ibid., p. 341.
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Written by: Albert Oosterhoff
Posted on: September 8, 2016
Categories: Commentary
1. Introduction
In a recent blog post I mentioned the topic of abatement in passing. In this post I want to address the topic in greater detail, with specific reference to property that is the subject matter of a general power of appointment. However, in the process I shall explore the nature of a general power of appointment and the reason why the property that is subject to it is not always sacrosanct.
Before any beneficiary becomes entitled to property the testator has given to him, the debts must first be paid.[1] In this context, “debts” includes the debts and liabilities of the testator, as well as funeral, testamentary, and administration expenses.[2] If the estate is insolvent, the creditors are entitled to the whole estate, according to their priority or preference. The general creditors come last and take a pro rata share of what is left.[3]
The doctrine of abatement concerns the order in which testamentary gifts are reduced if the assets of the estate are insufficient, after the debts have been paid, to pay the gifts in full. That order depends to a large extent on how the gifts are classified, although the testator can change the order in her will.
Testamentary gifts are classified as specific, demonstrative, general, or residuary. A specific gift is a gift of identifiable property or object that the testator has described with sufficient particularity to distinguish it from the general estate. It should be distinguished from general and residuary gifts. A general gift is one that is payable out of the general funds of the estate. A residuary gift, of course, is a gift of all or part of the assets that the testator has not otherwise disposed of. Specific gifts are accorded priority over other gifts in the payment of debts, but they can abate (i.e., be reduced) once the other gifts have been exhausted to pay debts. They can also abate among themselves if payable out of a specific fund that is insufficient to pay them all in full.[4] One drawback of specific gifts is that they can adeem. That happens when the subject matter of the specific gift no longer exists when the testator dies, because he has disposed of it, or it has been destroyed. The beneficiary then receives nothing. Another type of gift is the demonstrative gift, which is a gift directed to be satisfied primarily (as distinct from exclusively) out of a particular fund or asset. Such a gift is treated as a specific gift in the sense that it does not abate if the fund out of which it is to be paid is sufficient to satisfy it, until the estate out of which the general legacies are to be paid is exhausted by the payment of debts. However, if the source out of which the demonstrative gift is to be paid no longer exists, the gift does not adeem, but is treated as a general legacy.
2. Abatement at Common Law
At common law a gift of land was always treated as a specific gift, even if it was included in the residue of the estate. Thus, the common law order of abatement for testamentary gifts was: (1) residuary personalty; (2) residuary realty; (3) general legacies, including pecuniary legacies from residue; (4) demonstrative legacies; (5) specific bequests of personalty; and (6) specific devises of real property.[5]
However, this order has been changed, at least in part, in most jurisdictions. Thus, for example, s. 5 of Ontario’s Estates Administration Act[6] provides:
Some jurisdictions have gone considerably further. Thus, s. 50 of the new British Columbia Wills, Estates and Succession Act[9] provides:
50. (1) This section is subject to a contrary intention appearing in a will.
(2) If a will-maker’s estate is not sufficient to satisfy all debts and gifts, the debts and gifts must be satisfied or reduced in accordance with this section.
(3) Land charged by the will-maker with payment of debts or pecuniary gifts, or both, is primarily liable for the debts and gifts, despite a failure of the will-maker to expressly exonerate the personal property.
(4) Land and personal property must be reduced together.
(5) Subject to subsection (3), assets are reduced in the following order:
(a) property specifically charged with a debt or left on trust to pay a debt;
(b) property distributed as an intestate estate and residue;
(c) general, demonstrative and pecuniary legacies;
(d) specific legacies;
(e) property over which the will-maker had a general power of appointment.
At first blush, s. 50(5)(e) of the British Columbia Act may seem strange. Why should property over which the will-maker had general power of appointment be included in this list? It is not the property of the testator, is it? That is the question I wish to examine in this post. Having done so, I shall then return to the question why property over which the testator had a general power of appointment is made available to the testator’s creditors.
3. Nature of a General Power of Appointment[10]
A power of appointment is the authority given by one person to another to appoint (i.e., to select) the person or persons who are to receive the property that is the subject matter of the power. The power is created by the owner of the property, who is called the donor of the power. The person to whom the power is granted is called the donee of the power, or the appointor, and the persons to whom the donee may appoint are the objects of the power, or when selected by the donee, the appointees. Thus, it is apparent that the donee is not the owner of the property; the donor is and the objects may become the owners. Depending upon the terms of the power, it may be exercised either by deed or by will.
There are three types of powers: general, special, and hybrid. In this blog post I am concerned only with general powers.[11] The donee of a general power, unless she is a fiduciary, may appoint to anyone. She may even appoint to herself, unless the power is exercisable only by will. It is this characteristic of general powers that has caused problems. Many writers have said: if the donee can appoint to himself, then he is effectively the owner of the property, and a general power is “the equivalent of,” or is “tantamount to ownership.”[12] Or, as Lord St. Leonards said: “To make a distinction between a general power and a limitation in fee is to grasp at a shadow while the substance escapes.”[13] Some cases use similar language. Thus, in Pearson v. Pearson[14] the court said: “The donee is for all practical purposes in the position of a beneficial owner of the property.”
But if this were true why are the modifiers: equivalent, tantamount, practical purposes, etc. necessary? Those modifiers necessarily confirm that a general power of appointment is not property. If it were, the writers could have dispensed with the modifiers.
In fact, many cases recognize this. Thus, for example, in Fleming v. Buchanan[15] Turner L.J. noted that while property over which a testator has a general power of appointment is liable for his debts, “such property is not the personal or real estate of the testator.” So also, in Re Fasken,[16] Gale J. said, citing Fry L.J. in Ex p. Gilchrist, Re Armstrong,[17] “It is true that the creation of a power over property does not actually vest the property in the donee.” Indeed, the law is clear that when the donee appoints the property by deed to another person, or by will, the title shifts from the donor to the appointee and does not pass through the estate of the donee. Thus, it is the donor who gives the property, not the donee.[18] There is a further aspect to this as well. Often a general power of appointment contains a gift over to other persons who take in default of appointment. In law the property is vested in the other persons, subject to partial or complete divestment if, when, and to the extent the power is exercised by the donee.[19]
This position was also recognized forcefully by the Supreme Court of Canada. In Wanklyn v. M.N.R.,[20] Estey J. noted:
The giving of a general power of appointment at common law did not of itself constitute a disposition of property.
A Common Law Power enables the donee to pass the legal estate; but it is the execution, not the creation of the power, which effects the transmutation of estate. The legal estate before the execution remains in the creator of the power, or his grantee, or heir-at-law, as the case may be.[21]
When the donee exercised the power the beneficiaries took by virtue of the instrument creating the power, but not by virtue of the exercise thereof.[22]
Thus, the property interest is transferred only when the donee exercises the power.[23]
4. But it is Sometimes Treated as Property
Although I have established that a general power of attorney is not the same as property, it is undeniable that some cases and statutes treat it as property and they do so for good reason. Note carefully what the previous sentence means: A person may say: I know that a general power of attorney does not equal property, but in this particular situation I don’t care about that. I’m going to treat it as if it were. And I have a good reason for doing that.
To determine whether a general power should be treated as property, we need to have regard to what the law is trying to achieve in the circumstances. As the Privy Council said in Tasarruf Medvuati Sigorta Fonu v. Merril Lynch Bank and Trust Company,[24] context is all important. What follows is a list of circumstances in which a general power of attorney has been, or may be treated as property.
4.1 Payment of Debts
Tasarruf Medvuati Sigorta Fonu, the applicant and appellant in the case just mentioned, had been created by the Turkish state to restructure certain failed banks. In the process of doing that, it discovered that the former controller of one of the failed banks and his family and associates had misappropriated a lot of money. He had established two discretionary trusts in the Cayman Islands. He and his wife were the main beneficiaries of the trusts, but he also had a power to revoke them. Thus, he could revest the trust property in himself. Tasarruf sought the appointment of a receiver by way of equitable execution, so as to be able to have the trusts revoked and gain access to the funds. The controller defended on the ground, inter alia, that a power of appointment is not property. However, the Board held that “the powers of revocation are such that in equity, in the circumstances of a case such as this, [the controller] can be regarded as having rights tantamount to ownership.”[25]
This brings us back to the question why the property that is the subject matter of a general power of appointment held by a testator can be used, if necessary, to satisfy the testator’s debts. The origin of this principle is equity. Equity has always had a tender regard for the rights of creditors and so it developed the principle:[26]
that property, real or personal, comprised in a general power of appointment exercised by will, or by a deed not operating to transfer the property to the appointee during the lifetime of the appointor, was available, in default of other assets, for the payment of the appointor’s debts.[27]
The substance of this principle has been codified and carried forward into modern estate administration statutes, such as s. 50(5)(e) of the British Columbia Wills, Estates and Succession Act, reproduced above.[28] Section 54 of the Ontario Trustee Act[29] contains an older codification of the principle. It provides:
54. Property over which a deceased person had a general power of appointment, which he or she might have exercised for his or her own benefit without the assent of any other person, shall be assets for the payment of his or her debts where the same is appointed by will, and, under an execution against the personal representatives of such deceased person, such assets may be seized and sold after the deceased person’s own property has been exhausted.[30]
You should note that this section and the other modern statutes do not speak of a general power of appointment exercised by deed that takes effect after the donee’s death. However, as Timothy Youdan noted in a paper entitled “Powers of Appointment,”[31] presumably the equitable principle continues to apply to such a power. He also noted that, by virtue of s. 2(2) of the Estates Administration Act,[32] s. 2(1) has the effect of vesting the property that is subject to a general power of appointment exercised by will in the deceased appointor’s personal representative. He wondered whether s. 2(1) had the effect of making such property available for the payment of the appointor’s debts, or whether s. 54 of the Trustee Act would take priority and make such property available only after the appointor’s own property has been exhausted. Since s. 54 is more specific legislation I would suggest that it takes priority. Statutes in other provinces contain legislation similar to s. 2(1) of the Estates Administration Act.[33] The running head of s. 50(5) of the British Columbia Wills, Estates and Succession Act[34] makes it clear the assets subject to a general power of appointment are the last to abate.
You should also note that s. 67(1) of the Bankruptcy and Insolvency Act,[35] provides:
(1) The property of a bankrupt divisible among his creditors . . .
. . . shall comprise . . .
(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.
Hence, this legislation also favours creditors for valid reasons.
4.2 Perpetuities
The rule against perpetuities applies to all powers of appointment, both at common law and under modern perpetuities legislation and treats general powers as the equivalent of property. A general power was valid at common law so long as it was given within the perpetuity period. Further, for general powers, the perpetuity period began to run from the date of the appointment.[36]
Under perpetuities statutes, a general power that would have been void at common law because it could have been exercised beyond the perpetuity period, is presumptively valid until actual events establish that it cannot be exercised within the period. Further, the legislation treats a power as general if it is exercisable by one person only and can at all times be exercised by that person to transfer the whole of the property under the power to herself without the consent of any other person, or compliance with any other condition.[37]
4.3 Tax Purposes
It is possible that fiscal legislation could treat general powers of attorney as the equivalent of property.[38] For example, formerly, a transfer of property over which a deceased person held a general power of appointment could not be registered under the Registry Act,[39] until the Minister of Finance had consented to the transfer. The issue of whether general powers of appointment should be treated as property for income tax purposes is too complex to discuss in a blog post, but it was discussed at some length by Youdan in his paper and I refer the reader to it.[40]
4.4 Family Property Legislation
Under modern family property statutes, a spouse is entitled to share in family assets or to an equalizing payment of the spouses’ net family properties on a breakdown of marriage. Many of the statutes[41] also extend this right to the surviving spouse. The statutes define property and may include property over which a spouse holds a general power of appointment. Thus, for example, s. 4(1) of the Ontario Act[42] contains the following definition:
“property” means any interest, present or future, vested or contingent, in real or personal property and includes,
(a) property over which a spouse has, alone or in conjunction with another person, a power of appointment exercisable in favour of himself or herself.
The comparable New Zealand legislation, the Property (Relationships) Act, [43] contains a provision that is worded somewhat differently. Section 2(e) defines “property” to include the typical types of property, as well as “any other right or interest.” The New Zealand Supreme Court had to consider its meaning in Clayton v. Clayton.[44] The case dealt with a number of issues, but I shall focus solely on the meaning of this definition. Mark and Melanie Clayton married when Mark was just establishing his business. She signed a marriage agreement by which she opted out of her rights under the statute and the agreement made other provision for her if the marriage should fail. The business was an international success and was controlled by a trust.
The parties eventually separated and Melanie applied successfully to set aside the marriage agreement. Then she applied to set aside the trust. Mark was the settlor and sole trustee. The trust had a number of discretionary beneficiaries, including Mark and Melanie. The couple’s two daughters were the “Final Beneficiaries.” Mark had the right to appoint or remove discretionary beneficiaries.
The New Zealand Court of Appeal had held that this power allowed him to make himself the sole discretionary beneficiary.[45] The Supreme Court stated that if that decision was correct Mark would have a power tantamount to ownership of the trust property. However, it agreed that Mark could not remove his daughters as final beneficiaries. Consequently, the power was not the equivalent of ownership. But that was not the end of the matter for, as the Supreme Court noted, Mark could either: (a) appoint all income or capital or both to himself, without breaching any fiduciary duty to his daughters; or (b) resettle the trust property on a new trust of which he was the sole beneficiary, also without breaching any fiduciary duty.[46] That made the power Mark held a general power of appointment, because he could appoint the property to himself. And that being so, his powers were “any other right or interest” within the meaning of the statutory definition.
It is significant that the New Zealand Supreme Court expressed the opinion that the definition had to be interpreted within its statutory context and having regard to the fact that the statute is social remedial legislation. Thus, it concluded that “strict concepts of property law may not be appropriate in a relationship property context.”[47] It followed that Mark’s powers were property and the trust assets could be reached by Melanie.
Joel Nitikman commented on both the Court of Appeal decision[48] and on the Supreme Court decision.[49] With respect, I think he is right that both courts should not have treated a general power of appointment as property, or as “tantamount to” property.[50] I think he is also right in concluding that a court can legitimately hold, when interpreting a statutory definition of “property” within in the context of the statute and its purpose, that the definition can include the property subject to a general power of appointment.[51]
5. Conclusion
In summary:
(1) It is incorrect, because illogical, to describe a general power of appointment as tantamount or equivalent to property.
(2) However, depending upon the context in which the issue arises, including statutory definitions of “property,” the property that is subject to a general power of appointment may be made available to pay creditors, pay taxes, satisfy family property obligations, or possibly for other reasons. A general power of appointment is also specifically defined and treated as property for perpetuity purposes.
(3) The property that is subject to a general power of appointment may be reached to pay the debts of a testator, but only if the testator’
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[1] See Estates Administration Act, R.S.O. 1990, c. E.22, 2(1).
[2] Lecky Estate v. Lecky, 2011 ABQB 802, 72 E.T.R. (3d) 263.
[3] Cf. Trustee Act, R.S.O. 1990, c. T.23, s. 50(1).
[4] Culbertson v. Culbertson (1967), 62 D.L.R. (2d) 134 (Sask. C.A.).
[5] See Celentano Estate v. Ross, 2014 BCSC 27, 96 E.T.R. (3d) 265, para. 13. And see Theobald on Wills, 18th ed. by John G. Ross Martyn, Jane Evans-Gordon, Alexander Learmonth, Charlotte Ford, and Thomas Fletcher (London: Thomson Reuters/ Sweet & Maxwell, 2016, §32-013.
[6] R.S.O. 1990, c. E.22.
[7] R.S.O. 1990, c. S.26.
[8] Section 32 of the Succession Law Reform Act, ibid., provides that, absent a contrary intention, an interest in real or personal property that is subject to a mortgage is primarily liable to payment of that encumbrance.
[9] S.B.C. 2009, c. 13.
[10] I am indebted to Joel Nitikman of Dentons Canada, Vancouver, who initially sought my views on this topic, though in a slightly different context, and who later kindly shared some of his research.
[11] For a more detailed description of powers, see Oosterhoff on Trusts: Text, Commentary and Materials, 8th ed. by A.H. Oosterhoff, Robert Chambers, and Mitchell McInnes (Toronto: Thomson Reuters/Carswell, 2014), §3.6.
[12] Waters’ Law of Trusts in Canada, 4th ed. by Donovan W.M. Waters, Mark Gillen, and Lionel Smith (Toronto: Thomson Reuters/Carswell, 2012), p. 97
[13] Edward Sugden, A Practical Treatise on Powers, 8th ed. (1861), p. 396.
[14] 2012 BCSC 1262, at para. 84.
[15] (1853), 3 De G.M. & G. 976 at 979, 43 E.R. 382.
[16] [1961] O.R. 891, 30 D.L.R. (2d) 193 (H.C.) at para. 20.
[17] (1886), 17 Q.B.D. 521 at 531 (C.A.). This quotation from Gilchrist is quoted also in Montreal Trust Co. v. M.N.R., 60 D.T.C. 1183 (Ex. Ct.); Carter v. Congram, 1969 CarswellOnt 326 (H.C.) at para 20; Mordo v. Nitting, 2006 BCSC 1761 at paras. 362-363; Kennon v. Spry, [2008] HCA 56 at para. 176.
[18] See Sugden, A Practical Treatise on Powers, 8th ed. (1861), p. 470. And see ibid. p. 396.
[19] See Farwell on Powers, 3d ed., 1916, p. 310; Re Creighton, 1950 CarswellMan 59 (K.B.) at para. 35; Wanklyn v. M.N.R., [1953] 2 S.C.R. 58 at 75, per Cartwright J.
[20] [1953] 2 S.C.R. 58 at 63.
[21] Farwell on Powers, 3rd ed., p. 2.
[22] Attorney-General v. Parker, (1898) 31 N.S.R. 202 (C.A.); Re Lovelace, 4 De G & J. 340.
[23] See Carter v. Congram, 1969 CarswellOnt 326 (H.C.), para. 20; Mordo v. Nitting, 2006 BCSC 1761, paras. 361-363, in the last para. of which the court states that the object of the power, who was able to recall property that was vested in a trustee, “had no equitable interest at all until she exercised her power of appointment.”
[24] [2011] UKPC 17, para. 33.
[25] Ibid.
[26] Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, 20th ed. by John Ross Martyn and Nicholas Caddick (London: Thomson Reuters/Sweet & Maxwell, 2013), §49-14.
[27] See O’Grady v. Wilmot, [1916] 2 A.C. 231 at 248, per Lord Buckmaster.
[28] See text at footnote 9, supra. See also the Estate Administration Act, S.A. 2014, c. E-12.5, s. 28(1)(e); Administration of Estates Act 1925 (Eng.), 1925, c. 23, s. 32(1); Sched. I, Part II.
[29] Footnote 3, supra.
[30] See also, to the same effect, Execution Act, R.S.O. 1990, c. E.24, s. 29(2). And see also Succession Law Reform Act, R.S.O. 1990, c. S.26, s. 32(1).
[31] Presented at the Law Society of Upper Canada, “11th Annual Estates and Trusts Summit”, 19 November 2008, and available online at: https://www.google.ca/#q=Youdan,+Powers+of+Appointment&gws_rd=cr, at pp. 21-22.
[32] Footnote 1, supra.
[33] For the comparable legislation, see Oosterhoff on Wills, 8th ed. by Albert H. Oosterhoff, C. David Freedman, Mitchell McInnes, and Adam Parachin (Toronto: Thomson Reuters/Carswell, 2016), §3.2.
[34] See text at footnote 9, supra.
[35] R.S.C. 1985, c. B-3.
[36] See Oosterhoff on Wills, footnote 33, supra, §19.5.3(b)
[37] See ibid., §19.6.6(a). And see, e.g., Perpetuities Act, R.S.O. 1990, c. P.9, ss. 4(2), 11.
[38] See, e.g., Re O’Grady; O’Grady v. Wilmot, [1916-17] All E.R. Rep. Ext, 1385; Melville v. I.R.C., [2001] EWCA Civ 1247, [2002] 1 S.L.R. 407.
[39] R.S.O. 1990, c. R.20, s. 53(3)(b), (8).
[40] Footnote 31, supra, pp. 22ff.
[41] Such as Ontario’s Family Law Act, R.S.O. 1990, c. F.3, s. 5(2).
[42] Ibid.
[43] Property (Relationships) Act 1976 NZ, 1976, No. 166.
[44] [2016] NZSC 29. Kennon v. Spry, footnote 17, supra, was also a matrimonial property case in which property was held in a discretionary trust. The New Zealand Supreme Court followed it in Clayton.
[45] [2015] NZCA 30.
[46] There would not be a breach of fiduciary duty, because the trust gave these powers to Mark expressly.
[47] Clayton, footnote 44, supra, para. 79.
[48] Joel Nitikman, “Sham, Illusion and All that Jazz: A Case Comment on Clayton v. Clayton” (2016), 35 E.T.P.J. 146.
[49] Joel Nitikman, “Clayton v. Clayton in the New Zealand Supreme Court: It’s Hard to Keep a Good Court Down” (2016), 35 E.T.P.J. 333.
[50] Ibid., pp. 335, 336, 337, 341-42.
[51] Ibid., p. 341.
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