Master Finds That Settlor Must Expressly Invoke His Testamentary Power of Appointment in His Will in Order to Have Exercised it

IMO: Raymond L. Hammond Irrevocable Trust Agreement and PNC Bank Delaware Trust Company, as Trustee, Dated October 5, 2007. C.A. No. 10463-ML (January 28, 2016)

This dispute concerned a power of appointment (the “Power of Appointment) included within an agreement (the “Trust Agreement”) in Raymond Hammond’s (“Raymond”) qualified disposition trust (the “Trust”). In the Trust Agreement, Raymond reserved for himself a special testamentary power of appointment, to be exercised provided that he specifically referenced the Trust in his last will and testament (the “Will”). According to the Trust Agreement, if Raymond died without exercising the Power of Appointment and without a spouse, the trust assets were to pass to a residuary trust for the benefit of four individuals, including Kyle Kozak (“Kyle”). The disagreement between the parties was whether Raymond, who failed to specifically reference the Trust in the Will, effectively exercised the Power of Appointment.

Before Raymond died, he and his wife, Lisa, divorced. However, they maintained a close relationship. Upon separating in 2010, they entered into an agreement regarding their marital property rights and obligations.  The separation agreement, entered by the New Jersey Superior Court, stated that Lisa “shall remain, for her lifetime, the irrevocable beneficiary of [Raymond’s] [T]rust with PNC and shall remain the beneficiary even after the divorce.” In 2012, Raymond executed the Will and named Lisa as the executor and sole heir of his estate. However, the Will failed to specifically reference the Power of Appointment included within the Trust Agreement.

Following Raymond’s death in 2014, Lisa sought an order from the New Jersey court that issued the divorce decree to declare her to be the Trust’s sole beneficiary. In response, PNC (the trustee of the Trust) filed this Petition for Instructions in its attempt to determine whether Lisa is a beneficiary of the Trust. Both Lisa and Kyle answered the Petition, and Kyle filed a motion for judgment on the pleadings.

Lisa, in her motion, conceded that Raymond never complied with the “technical terms” of the Power of Appointment, but she argued that, under Carlisle v. Delaware Trust Co., despite the Trust Agreement’s unambiguous terms, the court may, and must, consider extrinsic evidence to make a determination that Raymond intended to exercise the Power of Appointment. Kyle, in his motion, argued that the court should interpret the Trust “according to the settlor’s intent at the time the [T]rust was created,” and that, because the Power of Appointment wasn’t properly exercised, the court should not consider Lisa’s arguments about Raymond’s intent and whether it changed after he created the Trust. Additionally, Kyle argued “that any evidence of Raymond’s intent during or after the divorce is immaterial because,” regardless of Raymond’s intent, the court lacks the power to modify the Will.

Noting the absence of any “real dispute” between the parties regarding Raymond’s intent when he settled the Trust, Master LeGrow concluded that the Trust Agreement was unambiguous. The Master wrote that Lisa’s argument, that Raymond intended for her “to continue as beneficiary of the Trust during her lifetime despite the divorce,” failed for two reasons: (1) She failed to point to any part of the Trust that was ambiguous so her extrinsic evidence of Raymond’s intent after creating the Trust was immaterial and; (2) Raymond’s intent at any time other than when he created the Trust was irrelevant since “[a] settlor’s intent at the time a trust is established is the controlling inquiry,” and because “an intent developed after creating a trust is irrelevant for purposes of construing the trust.”

The Master decided that Raymond failed to effectively exercise the Power of Appointment due to the formality (that he must specifically refer to the Trust in the Will) that he included in the Trust Agreement. Although Delaware law requires only that a donee’s “intention to execute the power” be “apparent and clear,” the Master pointed to a settlor’s ability to create a power of appointment which includes strict “formalities” that “the donee must observe in order to execute the power.” According to the Master, formalities “replace the judicial inquiry into whether the donee’s intent to execute the power was apparent and clear.” Therefore, the Master rejected Lisa’s argument that the court may, and must, consider extrinsic evidence of Raymond’s intent after the creation of the Trust because “where a power contains such formalities, judicial inquiry into a donee’s intent is not necessary because observance of the formalities is conclusive, and exclusive, proof of intent.”

The Master concluded that the court lacks the power to reform a will and recommended that the court grant Kyle’s motion for judgment on the pleadings.