Invalid excercise of power of appointment

[darling]

Son lends dad $10,000.
Dad dies, Son is now a creditor of Dad's estate.

Dad's will exercises a power of appointment over X's $1 million trust, pouring the trust assets into a new trust f/b/o Son.

The Trust PoA was a broad limited power - dad could appoint to anyone except himself, his estate, his creditors, or the creditors of his estate.

Question: Son is clearly a creditor or creditor of the estate. Would the appointment to the trust f/b/o Son be valid or invalid? Why or why not?

I feel like this is an elementary question with an obvious answer, but after a lot of digging I'll be hornswoggled if I can find some clear-cut authority.

I'd be extremely grateful for any pointing in the right direction.

[Judge Roy Bean]

This is not legal advice.

Was the "loan" reported on tax returns?

[Arthur Rubin]

Was there a signed, written agreement between dad and son?

I don't think loan contracts need to be written to be valid, if they could be completed in less than a year. At least, that's the way I read it from my Contracts I course.

Was the "loan" reported on tax returns?

Loans aren't reported on tax returns. If there was interest, and it was reported on the son's tax return, that would be a "record" of the loan. If there wasn't actual interest, the $10,000 principal is too low for imputed interest rules to require the son to report interest.

And I have absolutely no idea about the legal question that started the thread. I'm a tax preparer, not a lawyer.

[darling]

Was there a signed, written agreement between dad and son?

Was the "loan" reported on tax returns?

The OP is a very simplified version of the issue at hand. Let's assume the loan is valid and binding and also that it cannot be forgiven or eliminated.

And I have absolutely no idea about the legal question that started the thread.

I want to thank you all for your input so far. I realize that the question doesn't pertain to tax directly - although the issue arises from a tax provision - but maybe someone has come across this before.

I feel like I'm missing something but can't put my finger on it!

[notorial dissent]

Since the son wasn't the trustee to begin with, and since there has to be someone to carry out the provisions of the old trust, why cannot they repay the loan thus eliminating the son as a creditor and returning his eligibility to be trustee under the new trust? Since I am sure that in there there is some expectation of debts being settled.

[jcolvin2]

The Trust PoA was a broad limited power - dad could appoint to anyone except himself, his estate, his creditors, or the creditors of his estate.

This is not my area, but the purpose of the clause may have been to prohibit an assignment for the benefit of creditors, rather than an exercise of the power to gift the assets to a natural beneficiary who just happens to have loaned a small amount of money to dad.

If you are worried, son could waive his rights as a creditor.

[darling]

This is not my area, but the purpose of the clause may have been to prohibit an assignment for the benefit of creditors, rather than an exercise of the power to gift the assets to a natural beneficiary who just happens to have loaned a small amount of money to dad.

It's true: the purpose of the clause was to prevent it being a general power of appointment which would include the trust in Dad's estate. Dad is exercising his power with bona fide gift intent. The question is, can he?

If you are worried, son could waive his rights as a creditor.

... why cannot they repay the loan...

Again, please let's assume the loan can't be repaid or waived.

[notorial dissent]

You need to talk with someone who is in practice, in the state the trust is domiciled in, who specializes in trusts, as the laws will vary by state and only someone who really specializes in that field will be able to answer your questions.