All About Estates

Powers of Appointment vs. Trusts – Failure to distinguish between them in Wills

This Blog was written by: David McPhee, Estate and Trust Consultant, Scotia Wealth Management 

When the term “power of appointment” comes to mind, one often thinks of the provision in a will or inter vivos trust deed which creates a trust for a beneficiary for his or her lifetime, and then goes on to say that the beneficiary has the ability to specify in writing, either through his or her will or through another document, who shall be entitled to receive the balance of the funds in the trust at the beneficiary’s death.

Powers of appointment can also be used in a different situation where a testator grants to the donee of the power of appointment (who might be either the executor or a third party) the authority to decide who shall receive the estate or that part of the estate subject to the power of appointment. If proper care is not taken in drafting such powers of appointment in wills, this can result in litigation after the testator’s death. This blog will look at what might go wrong in these situations.

Problems arise when the will does not make it clear whether the testator intended to create a power of appointment or a trust. That is because a trust must meet the “three certainties” to be valid. It must be shown  that (a) the creator of the trust  intended to create a trust (“certainty of intent”)  (b) the governing document clearly indicates what property the trust is dealing with  (“certainty of subject matter”) and (c) the governing document clearly indicates who is to benefit from the trust (“certainty of objects”). A trust requires certainty of objects but a power of appointment does not. If a court determines that it was the intention of the testator to create a trust in his or her will, but finds the trust to be invalid because it did not sufficiently describe the beneficiaries, then the residue of the  estate  will be divided among those entitled to receive under an intestacy.

It is clear that the drafter of a will cannot afford to be careless when drafting a power of appointment. Surely it would be preferable, in order to avoid litigation, for the drafter to at least use the term “power of appointment” in the will if that is what is intended. But there are cases where this has not happened.

The case law illustrates the range of alternative interpretations that are open to a court when the wording of a will is not clear enough. These alternative interpretations are that the testator intended assets of an estate to be distributed as  (a) a gift (b) under a power of appointment (c) by the terms of a valid trust or (d) by the rules of intestacy where the trust is invalid because of uncertainty of objects. If the wording is not clear, the courts must carefully study the surrounding facts of the case to help them make decisions.

Two examples of the types of clauses the courts have had to consider are:

  1. “[c] To pay transfer and deliver all the residue of my estate to my said Executor to deal with as he may in his dicretion [sic] decide upon.”

 Jankowski v. Pelek Estate, 1995 CanLII 11066 (MB CA)  Jankowski v. Pelek Estate

The will was drafted by a lawyer, who was also the executor. In a 2-1 decision, the majority of the Court was satisfied on the evidence that the testatrix intended to make a power of appointment. Interestingly, on the particular facts of the case, the majority of the court was also satisfied that the power of appointment was subject to a secret trust.

  1. “My entire estate – cash, my house … and my quarter section of land … if it is then still in my possession, I leave to my son Paul Johan Lubberts and to my youngest daughter Irene Lubberts Hanson to jointly manage it and use it for their own benefit as salary for instance, or for the benefit of one of their siblings or of one of my grandchildren – as for instance medical expenses. Irene and Paul will make these decisions together and without yielding to any pressure applied by possible recipients.”

Lubberts Estate (Re), 2014 ABCA 216

In that case the Court held that the holograph will created a trust which failed due to the uncertainty of objects. They determined that it was not a gift, nor was it a power of appointment. The Court was satisfied from the evidence that given that the testator had a strong controlling personality, the notion she would be willing to give anyone a power over her estate to do what the appointor thought appropriate was impossible to accept. As a result, the Court found an intestacy.  See also commentary on this case from the All About Estates blog from July 17, 2014 by Diana Vieira entitled “Trust created in Holograph Will fails”

My view is that litigation could have been avoided in both cases if the drafting party had turned his or her mind to the legal nature of the arrangement and then properly documented this.

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