A Trustee’s Guide to the Power of Appointment

One of a trustee’s many powers is the power of appointment, which is most frequently used. Additionally, beneficiaries will scrutinize this power the greatest.

This article aims to provide a summary of the key factors trustees should consider when determining whether to exercise their appointment authority, as well as practical steps to ensure adherence to the trust agreement.

1. Reviewing the Trust Document

The trustee must examine the settlement document (and any modifications) before exercising any authority to verify the extent of the authority and any possible restrictions. Typically, this entails verifying:

• Who has the authority? In some situations, the settlor may reserve the power of nomination, even though it will often be the trustee.
• Is a third party’s consent necessary? For example, before using their authority, the trustee may need to obtain the approval of a protector. If so, there may be a specific procedure that needs to be followed to get the protector’s consent; for instance, the trust document may specify how and when consent is to be given.
• Which formalities need to be followed? Strict adherence to formalities is necessary to prevent the exercise of authority from being deemed unlawful, even if they seem essentially administrative (such as specific signing requirements).
• Appointments to other trusts: If the trustee wishes to appoint assets to another trust, they should consider any limitations, such as the level of beneficiary commonality required and the treatment of excluded individuals.
• Beneficiaries who are minors: The trustee should review the conditions of the trust instrument to determine if a parent or guardian must be appointed or if distributions can be paid directly to a minor, provided the exercise of power is for the benefit of the minor.

2. Tax and Legal Considerations

The trustee should consider early on whether the trust or the recipient of the money will be affected by taxes in any way. Before deciding on these circumstances, the trustee should obtain proper tax guidance.

When allocating assets to beneficiaries and determining whether there are any chain indemnity duties, trustees must also think about whether an indemnity is necessary. As early in the decision-making process as feasible, the trustee’s legal counsel should be consulted if there is any uncertainty regarding the extent of the authority granted by the Trust Instrument or the necessity of indemnities.

3. Determining Appropriateness of the Appointment

The trustee must next determine whether it is appropriate to exercise its appointment power, having confidence in its authority to do so and understanding any restrictions on its use. The trustee should take into account the following aspects while making this decision:

• All beneficiaries’ needs and financial situation, including any projected future requirements (not simply the intended receiving beneficiary). For example, the trustee may refuse a distribution to a more financially stable beneficiary until they have thoroughly evaluated the needs of the economically vulnerable beneficiary, especially if the trust has relatively low liquidity and the trustee knows that one of the beneficiaries will soon require financial assistance.
• What was the justification for the trust’s creation, and would the appointment align with that justification?
• Any letter of wishes or other similar instructions from the settlor, which can include instructions on how and when to make distributions.
• The anticipated magnitude of the trust fund’s distribution and the trustee’s capacity to cover ongoing trust costs.
• The liquidity of the trust and its capacity to handle the payout.
• The reason for the appointment and the best method for receiving payment. For instance, if a parent is not a beneficiary of the trust, it may be more suitable for the trustee to pay the minor beneficiary’s school fees directly to the school rather than through the parent.

This is not an exhaustive list, and ultimately, the trustee’s consideration of pertinent elements will depend on the specific trust, its assets, and its beneficiaries. What may have been a relevant consideration for one distribution may not be significant for a future exercise of power, as the significance of these criteria may also shift over time.

4. Avoiding Bias and Ensuring Proper Documentation

The trustee must always exercise objectivity and avoid unrelated factors, being cautious not to unfairly favour one beneficiary over another unless specifically allowed by the trust’s provisions.

The trustee must take the time to compile all pertinent facts before reaching a decision, even if beneficiaries are putting pressure on them to do so. When distributions are given regularly, it’s also critical that the trustee conducts a new evaluation each time, as even though an appointment with a beneficiary may have been suitable in the past, it may not be appropriate in the future if circumstances change.

Lastly, after reaching a decision, a trustee should ensure that all information supporting that decision is documented correctly. Typically, a trustee minute or resolution is used for this purpose. These actions will ensure that the trustee’s decisions are thoroughly thought out and reduce the likelihood that they will be contested later.

If you have any questions, please do not hesitate to contact us.