8.2 Creditors and Limited Powers of Appointment

As a general rule, creditors of the donee of a limited or special power of appointment cannot reach the property.   In Mercantile Trust Co. v. Bergdorf & Goodman Co., 167 Md. 158, 173 A. 31 (1934), a woman created a self settled trust and retained an income interest for life and retained a testamentary power of appointment to heirs.   In the absence of a showing of fraud in the inception of the trust, creditors had no recourse against the principal of the trust.   Likewise in United States v. Baldwin, 283 Md. 586, 391 A.2d 844 (1978), a settlor retained income for life, could name himself as trustee, and retained a broad (but not general) testamentary power of appointment.   The Court held that the principal was beyond the reach of creditors (including the U.S. as creditor based on income tax liability.) As discussed below, however, a settler may not create a trust and retain a presently exercisable limited power of appointment, even subject to ascertainable standards, without exposing the maximum amount that he or she could reach to creditors. In re Robbins, 826 F.2d 293 (C.A. 4th Md. 1987).