Whether an equitable power of appointment incident to a trust relationship is “in gross” or “collateral”: The practical implications

Section 17.3, comment f, of the Restatement (Third) of Property (Wills and Other Donative Transfers) explains the difference between a collateral power of appointment and a power of appointment in gross: “In traditional terminology, a power of appointment is ‘collateral’ if the donee has no owned interest in the appointive assets. A power of appointment is ‘in gross' if the donee has an owned interest in the appointive assets separate from the donee's power of appointment, such as when the income beneficiary of a trust has a power of appointment over the remainder interest.” So far so good, although the term remainder in this context is not entirely accurate. As an equitable future interest under a trust lacks a previous estate to support it, legal title being in the trustee, it is analogizing to refer to such an interest as a remainder. But the comment concludes with an assertion that is neither explained nor buttressed by supporting authority in the Reporter's Notes: “The terms collateral power and power in gross are descriptive only, and carry no legal consequences.” There is a 1990 English pension trust chancery case in which the judge sort of said the same thing. He described the dual classification as “of antiquarian interest only.” Perhaps. But consider the following four situations where it might well be currently consequential if a donee holds a power of appointment in gross rather than collaterally. First, a donee/holder of an equitable general testamentary power of appointment in gross may be able to ratify breaches of trust and in so doing, eradicate the interests of the takers in default. This possibility is considered in §8.14 of Loring and Rounds: A Trustee’s Handbook (2024). See appendix below. Second, it may still be the case in some jurisdictions that property subject to a reserved collateral equitable general inter vivos power of appointment is not subject to the claims of the powerholder's creditors, whereas if the power were held in gross, the property would be subject to such claims. This possibility is considered in §5.3.3.1 of the Handbook. Third, take an equitable collateral power of appointment. The donee of the power is X. The trustee is Y. Both the equitable life estate and the equitable quasi remainder are in Z. If Y were to transfer legal title to Z, there would be a merger in Z. One consequence of the merger would be that X’s collateral power of appointment would extinguish. Now assume that X’s power is in gross. X is, say, both the donee of the power and owner of the quasi remainder. Z is the current equitable beneficiary. Were Y to transfer the legal title to Z, there would be no merger and thus no extinguishment of X’s power of appointment in gross. The topic of merger is discussed generally in §§ 8.7 and 8.15.36 of the Handbook. Fourth, assume Y possesses a legal fee simple in property that is not entrusted. A legal naked collateral power of appointment in X would be void as being repugnant to Y’s fee. This would not necessarily be the case if the legal power, instead, were in gross. Note that an equitable naked collateral power of appointment incident to a trust relationship should not run afoul of the doctrine of repugnancy, absent a merger of the legal and equitable property interests.