The New Colorado Uniform Powers of Appointment Act

The New Colorado Uniform Powers of Appointment Act Prepared by: Susan L. Boothby, Esq. 1 Berenbaum Weinshienk PC 370 17 th Street, Suite 4800 Denver, Colorado 80202 303-825-0800 sboothby@bw-legal.com I. What is a power of appointment? A power of appointment is the right given the owner of property (a donor ) to another person (a powerholder ) to determine who will enjoy the beneficial ownership interests in the appointive property. An owner, of course, has the authority to decide who will enjoy his or her own property. By creating a power of appointment, the owner confers this authority on someone else. 2 In other words, once a power of appointment is created, the powerholder gets to chose who will receive an interest in a former owner s property. The choice is between permissible appointees and those who would take if the power is not exercised ( takers in default ). II. Historical Perspective A. Origins and Present Uses of the Power of Appointment. The power of appointment originated in England as a method to circumvent a law enacted by Parliament prohibiting transfers of real property by will. Instead of devising property by will, the will could name a person who had the power to devise the property. 3 The power of appointment has evolved since that time in the United States, and its use became more widespread with the advent of federal, gift, and income taxation in the early part of the twentieth century. 4 Today, the power of appointment is a core tool used by modern United States estate planners. Example: Client desires that a trust benefit her child and her grandchildren. 1 This discussion of the New Colorado Uniform Powers of Appointment Act would not be possible without the dedicated and thorough analysis of the provisions of this Act by Stan Kent, John DeBruyn, Barbara Dalvano, Brian Marsiglia, Carl Stevens, David Griffith, David Struthers, Elizabeth Meck, Eugene Zuspann, Jane Paddison, Matthew Meuli and Peter Bullard, members of the subcommittee of the Statutory Revisions Committee of the Trust and Estate Section of the Colorado Bar Association. 2 Prefatory Note, Uniform Powers of Appointment Act, page 1, September 24, 2013. 3 Bloom, Ira, Power of Appointment Legislation in New York: Its Time for Modernization, 76 Alb. L. Rev. 9, at 12 2013. 4 Id. {00365743:2} 1

Choice One: The client can fund a trust giving her child a life interest, and upon the child s death the remainder of the trust passes to the grandchildren. Choice Two: The client can fund a trust giving her child a life interest, and upon the child s death the child can appoint what remains in the trust to client s grandchildren as the child thinks is most appropriate. The trust remains flexible until the child dies, it gives the child control over the principal, the trust corpus cannot be reached by creditors, and the trust corpus escapes federal estate taxation upon child s death. A power of appointment adds flexibility to irrevocable estate plans to take into consideration changed circumstances. B. National Conference of Commissioners on Uniform State Laws. The National Conference of Commissioners on Uniform State Laws ( NCCUSL ) codified the law on powers of appointment in the Uniform Powers of Appointment Act in 2013 (the Uniform Act ). In its efforts, the NCCUSL drafting committee 5 heavily relied on the Restatement (Third) of Property: Wills and Other Donative Transfers, (the Restatement 3 rd Property ) published in 2011 by the American Law Institute. C. Statutory Revisions Committee Review. Even while the Uniform Act was in draft form, a subcommittee of the Statutory Revisions Committee Section of the Colorado Bar Association (the SRC Subcommittee ) began meeting regularly to review the provisions of the Uniform Act. The SRC Subcommittee also studied the Official Comments created by NCCUSL (the Comments ), the Restatement 3 rd Property sections relied on by NCCUSL, and Colorado law on the subject (both case law and statutes.) A by-product of the SRC Subcommittee work is the 319 page report available on the CBA website, which includes the provisions of the Uniform Act, the Comments, the relevant Restatement 3 rd Property sections, Official Comments to the Restatement sections, and the SRC Subcommittee s comments and recommendations. D. Colorado Legislation. Colorado is one of the few states that has enacted powers of appointment legislation and some of those provisions date back to 1963. 6 The previous Colorado statutes focused on the proper creation of a power of appointment, the exercise of a power of appointment and disclaimer and releases of powers of appointment. The new Colorado Uniform Powers of Appointment Act (the Colorado Uniform Act ) has not substantively changed any provision of the prior law, but instead addresses many issues not covered in current Colorado legislation or case law. To allow estate planning practitioners to become familiar with the Colorado s Uniform Act provisions the effective date of the new Colorado Uniform Act is July 1, 2015. 5 One of the members of the drafting committee of the Uniform Powers of Appointment was Colorado trust and estate attorney, Stan Kent. 6 See C.R.S. 15-2-101 through 15-2-303. {00365743:2} 2

III. Colorado Uniform Powers of Appointment Act A. Definitions [C.R.S. 15-2.5-102] 1. The Players. The Colorado Uniform Act defines four specific roles central to the power of appointment: The person who creates a power of appointment is the donor. 7 The person who may exercise the power is the powerholder (rather than the more confusing donee ). 8 A person who may receive appointive property is a permissible appointee (or just an appointee following receipt). 9 A taker in default of appointment is the person who takes all or part of the appointive property to the extent the powerholder does not effectively exercise the power of appointment. 10 2. Definition of Power of Appointment. The Colorado Uniform Act defines a power of appointment as a power that enables a powerholder acting in a nonfiduciary capacity to designate a recipient of an ownership interest in or another power of appointment over the appointive property. 11 The requirement that the powerholder must act in a non-fiduciary capacity is a very important distinction from the powers held by a trustee of a trust. The Comments to the Uniform Act state the following powers are powers of appointment: 12 A power to revoke or amend a trust or power to withdraw income or principal from a trust. A power to direct a trustee to distribute income or principal to another. On the other hand, the Comments to the Uniform Act state the following powers are not powers of appointment: 13 A power over management of property A power to designate or replace a trustee or other fiduciary A power of attorney is not a power of appointment A trustee with the power to revoke, amend or distribute is not a power of appointment the exercise of these powers held by a trustee is subject to fiduciary standards. On the 7 C.R.S. 15-2.5-102(4). 8 C.R.S. 15-2.5-102(13). 9 C.R.S. 15-2.5-102(11) and (1). 10 C.R.S. 15-2.5-102(18). 11 C.R.S. 15-2.5-102(14). 12 Comments, Uniform Powers of Appointment Act, page 6, September 24, 2013. 13 Id.at page 7. {00365743:2} 3

other hand, the exercise of a power of appointment is not subject to fiduciary standards. 14 3. Timing of Exercise. The Colorado Uniform Act and the Comments distinguish among three different types of powers of appointment based upon when they may be exercised. A power of appointment is presently exercisable at the time in question, typically during the powerholder s life. 15 Example: Each daughter may withdraw from time to time, free of trust, from the principal of her trust, whatever amounts the daughter requests in writing, provided, however, that before attaining the age of 55, the total of these requests may not exceed in the aggregate one-half of the principal of the trust valued at the time of the first withdrawal. A power of appointment is a postponed power if it is not yet exercisable until the occurrence of an event, the satisfaction of an ascertainable standard, or the passage of a specified time. Example: When each child attains the age of 25 years he or she may withdraw from time to time, free of trust, from the principal of his or her trust, whatever amounts the child requests in writing, provided, however, that before attaining the age of 55, the total of these requests may not exceed in the aggregate one-half of the principal of the trust valued at the time of the first withdrawal. [The power of appointment is postponed until the age the powerholder reaches the age of 25.] A power of appointment is testamentary if it is not exercisable during the powerholder s life but only in the powerholder s will (or in a functionally equivalent instrument such as a revocable trust.) Postponed powers and 14 Although beyond the scope of this outline, for federal estate tax purposes, the definition of a power of appointment include a trustee who holds a fiduciary power. For example, if a trustee has an unrestricted power to appoint the income or the property of a trust among a group of persons including him or herself, the trustee, in spite of his or her role as a fiduciary, has a general power of appointment. Similarly, if a trustee is authorized to make distributions that would satisfy his or her obligation of support, the trustee has a general power of appointment. For a more complete discussion of the Internal Revenue Code s treatment of powers of appointment, see, Denson, Gregory T., Powers of Appointment, Colorado Estate Planning Handbook 23.2 (2013). 15 C.R.S. 15-2.5-102(15). {00365743:2} 4

testamentary powers are not defined in the Uniform Act but are referred to in the NCCUSL comments. 16 Example: My trustee shall distribute the remaining assets of the Daughter s Trust to any one or more of my daughter s descendants as my daughter may appoint by Will, expressly referring to this power of appointment. 4. General versus Nongeneral Power of Appointment. C.R.S. 15-2.5-102 (6) and 15-2.5-102 (10) distinguish between a general power of appointment and a nongeneral power of appointment (called a special power of appointment in the former Colorado statute, and also sometimes referred to as a limited power of appointment.) A general power of appointment allows the powerholder to exercise the power in favor of one or more of the following: the powerholder, the powerholder s estate, the creditors of the powerholder, or the creditors of the powerholder s estate. 17 This is the same definition for federal estate and gift tax purposes. 18 Example of Testamentary General Power of Appointment: My trustee shall distribute the remaining assets of the Daughter s Trust to any one or more of my daughter s creditors as my daughter may appoint by Will, expressly referring to this power of appointment. [It is possible that the donor would not anticipate that his daughter would exercise this power of appointment. However, by giving her a general testamentary power of appointment, the assets of the trust will get a step-up in basis because the assets will be included in daughter s estate. 19 It also ensures that the creditors of the daughter cannot reach the assets of the trust if the daughter does not exercise her appointment. See page 18 of this outline.] Any power of appointment which is not a general power of appointment is a nongeneral power of appointment. 20 Example of Testamentary Nongeneral Power of Appointment: My trustee shall distribute the remaining assets of the Daughter s Trust to any one or more persons as my daughter may appoint by Will, other than my daughter, my daughter s creditors, my daughter s estate or the creditors of my daughter s estate. 16 Comments, Uniform Powers of Appointment Act, page 8, September 24, 2013. 17 C.R.S. 15-2.5-102(6). 18 I.R.C. 2041(b)(1) and 2514(c); and Treas. Reg. 20.2041-1(c)(1). 19 Id. I.R.C. 2014 includes in the gross estate the value of property to the extent the decedent at the time of his or her death held a general power of appointment. 20 C.R.S. 15-2.5-102(10). {00365743:2} 5

5. Additional Definitions. Other definitions describe different types of powers and different methods of exercising a power which will be discussed later in this presentation. B. Governing Law. Unless otherwise provided in the terms of the instrument creating the power of appointment: 1. C.R.S. 15-2.5-103(1)(a) provides that the laws of the domicile of the donor govern the creation, revocation or the amendment of a power of appointment. 2. C.R.S. 15-2.5-103(1)(b) provides that the laws of the domicile of the powerholder at the relevant time govern the exercise, release or disclaimer of a power of appointment. C. Creation, Revocation and Amendment of Power of Appointment [C.R.S. 15-2.5-201 through 15-2.5-206] 1. Creation. C.R.S. 15-2.5-201 provides the framework governing the creation of powers of appointment: the power must be in a valid governing instrument that transfers the appointive property and must use terms showing the donor s intent to create a power to appoint property. C.R.S. 15-2.5-102(9) defines instrument as either a writing or a record. Record is defined as information that is inscribed on a tangible medium or stored in an electronic or other medium and is retrievable in perceivable form. 21 Example: Mother executes a will providing a trust for life for daughter and giving daughter a testamentary power of appointment over the remainder of the trust. The will is invalid because Mother lacked testamentary capacity at the time she executed the will. The creation of the power of appointment is ineffective because it was not created in a valid governing instrument. Further, the powerholder cannot be deceased when the transfer that is intended to create the power becomes legally operative. 22 Example: Mother executes a will providing a trust for life for daughter and giving daughter a testamentary power of appointment over the remainder. Daughter, knowing mother has created a testamentary power of appointment in her will, executes a will exercising the power of appointment bestowed on her by Mother s will. Daughter predeceases mother. The effective date of the power of appointment in mother s will is the date of Mother s death, not the date of the execution of the will. Therefore, Mother 21 C.R.S. 15-2.5-102(16). 22 C.R.S. 15-2.5-201(3). {00365743:2} 6

has appointed a powerholder who was deceased at the time the power became legally operative. The creation of the power is ineffective and the daughter s exercise is ineffective. 2. Is a Power of Appointment Transferable? C.R.S. 15-2.5-202 states that a power of appointment is nontransferable. 3. In Case the Power is Unclear, We Now Have Presumptions. C.R.S. 15-2.5-203, 15-2.5-204, and 15-2.5-205 provide rules and presumptions as to the extent of the power, which are applicable if the terms of the power are not sufficiently clear. a. Presently Exercisable or Postponed? If the instrument creating the power is unclear, there is a presumption that the power of appointment is presently exercisable. 23 b. Exclusionary or nonexclusionary? If the instrument creating the power is unclear, there is a presumption that the power is exclusionary 24 (one in which the donor has authorized the powerholder to appoint any one or more of the permissible appointees to the exclusion of the other permissible appointees.) 25 Example: to such descendants as the powerholder selects is exclusionary. Example: to appoint to all and every one of my children in such shares and proportions as the powerholder shall select is nonexclusionary. 26 The Comments point out that if the power is non-exclusionary (i.e. an appointment that must benefit all permissible appointees) the doctrine of forbidding illusory appointments would require an appointment that confers a reasonable benefit to all permissible appointees. If, instead, the appointment provided a nominal sum to one or some of the permissible appointees, the entire appointment would be forbidden. 27 c. General or nongeneral? If the instrument creating the power is unclear, there is a presumption that the power is general. The power, however, is presumed to be non-general if the power is testamentary and the permissible appointees are a defined and limited class that does not include the powerholder s estate or the creditors of the powerholder. 28 C.R.S. 15-2.5-204 addresses 23 C.R.S. 15-2.5-203(1)(a). 24 C. R. S. 15-2.5-203(b). 25 Exclusionary power of appointment is defined at C.R.S. 15-2.5-201(5). 26 Comments, Uniform Powers of Appointment Act, page 5. 27 Id., at page 17. 28 C.R.S. 15-2.5-204(2). {00365743:2} 7

a recurring drafting mistake. Scriveners sometimes forget that X s descendants include X s children. A testamentary power of appointment created in the donor s child to appoint among the donor s descendants is usually intended to be a nongeneral power. 29 Examples of defined and limited permissible appointees are class gifts such as grandchildren or descendants. 30 Example: Mom transfers property in trust, directing the trustee to pay the income to Mom s son for life, remainder to any of Mom s descendants as son shall appoint. The power is presumed to be nongeneral, even though son, himself, is a descendant and could appoint to himself as a descendant of Mom. Under C.R.S. 15-2.5-204(2), if a power must be exercised in conjunction with another person who has a substantial beneficial interest in the property, (defined as an adverse party ) 31 the power is considered nongeneral. Example: Mom transfers property in trust, directing the trustee to pay the income to Mom s son for life, remainder to such of Mom s grandson and granddaughter, with the consent of grandson, shall appoint; in default of appointment, remainder to Mom s grandson. Son s power to appoint is not a general power because Mom s grandson is an adverse party. 4. Revocation and Amendment. C.R.S. 15-2.5-206 states that a power may not be revoked or amended unless either a) the instrument creating the power is revocable, or b) the donor reserves a power of revocation or amendment. 314] D. Exercise of Power of Appointment [C.R.S. 15-2.5-301 through 1. Exercise. C.R.S. 15-2.5-301 sets out the rules for exercising a power of appointment. A power of appointment may only be exercised in a valid instrument, which manifests the powerholder s intent to exercise the power of appointment, and, if required, satisfies the requirements of exercise, if any, imposed by the donor. Example of standard residuary clause: All of the residue of my estate, I devise to does not ordinarily manifest a powerholder s intent to exercise a general power of appointment. 32 29 Comments, Uniform Powers of Appointment Act, page 15. 30 Id. At page 16. 31 C. R. S. 15-2.5-205(1). 32 Comments, Uniform Powers of Appointment Act, page 4 and 19. {00365743:2} 8

Example of blanket-exercise clause: 33 I hereby exercise any power of appointment I may have as follows: [fill in details of appointment]. 34 Example of specific-exercise clause: 35 I hereby exercise the power of appointment conferred upon me by section 5.2 my father s will, dated March 20, 2004, as follows: I appoint [fill in details of appointment]. 36 The clause referring to the document creating the power of appointment (the specific exercise clause) is underscored. Although the blanket-exercise clause manifests the powerholder s intent, it may not satisfy the requirement of a specific reference imposed by the donor in the instrument creating the power. 37 Practice Point: Blanket-exercise clauses are not recommended to exercise a power of appointment and standard residuary clauses rarely work. 2. In Case the Exercise of Intent is Unclear, We Now Have Presumptions. C.R.S. 15-2.5-302 through 15-2.5-304 apply if the powerholder s intent is unclear. a. The Use of Standard Residuary Clauses. A standard residuary clause, such as All of the residue of my estate, I devise to does not ordinarily manifest a powerholder s intent to exercise a general power of appointment. 38 CRS 15-2.5-302 states the rare exception that a standard residuary clause may give rise to manifest intent to exercise if: the terms of the instrument containing the residuary clause to not manifest a contrary intent; the power is a general power (under no circumstances will a standard residuary clause manifest intent to exercise a nongeneral power;) 39 the donor did not provide for takers in default or to the extent the gift in default clause is ineffective; and the powerholder did not release the power. b. After-acquired Powers. CRS 15-2.3-303 discusses the use of the blanket-exercise clause when a power has been exercised prior to the acquisition of the power. 33 Defined at C.R.S. 15-2.5-102(3), a blanket exercise clause is a clause that purports to exercise any power of the appointment the powerholder may have. 34 Comments, Uniform Powers of Appointment Act at page 20. 35 Defined at C.R.S. 15-2.5-102(17), specific exercise clause means a clause in an instrument, which clause specifically refers to and exercises a particular power of appointment. 36 Comments, Uniform Powers of Appointment Act, page 4 and 19. 37 Id. 38 Id. 39 Id, at page 22. {00365743:2} 9

Example: Mother executes a will providing a trust for life for daughter and giving daughter a testamentary power of appointment over the remainder. Daughter, prior to Mother s death, executes a will exercising her power of appointment by using a blanketexercise clause, all the powers I have. Mother dies, followed by Daughter. Daughter s blanket-exercise clause expresses intent that she intended to exercise her after acquired power of appointment. Example: Same example as above, however, Daughter used the phrase all powers I have at the date of the execution of this will. This is language that would indicate an intent to exclude an after-acquired power. 40 c. Substantial Compliance. The new substantial compliance provision of C.R.S. 15-2.5-304 applies to meeting the formal requirements imposed by the donor. The substantial compliance can only save an attempted exercise if the exercise does not impair a material purpose of the donor in imposing the requirement. 41 There are requirements that conceivably cannot be met by substantial compliance. For example, a requirement imposed by a donor that the powerholder needs to reach the age of 25 before the power may be exercised probably cannot be met by substantial compliance if the powerholder exercises the power at age 18. A material purpose of the donor in imposing the requirement that the powerholder reach the age of 25 is presumably a milestone that the donor determined the powerholder would have reached a certain level of maturity. The Comments indicate that substantial compliance with a requirement that the exercise be made in a will may be satisfied by an exercise in a revocable trust will substitute. 42 As long as the attempted exercise does not impair a material purpose of the donor in imposing the requirement, substantial compliance is sufficient. Does substantial compliance do away with the need for a specific-exercise clause? The Comments state that the original purpose of the specific-exercise clause was to prevent an inadvertent exercise of the power. An exercise in a blanket-exercise clause may, under certain circumstances, substantially comply with a formal requirement if the powerholder s manner of attempted exercise of the power does not impair a material purpose of the donor in imposing the requirement. 43 As you will recall, a specific-exercise clause is defined as a clause in an instrument, which clause specifically refers to and exercises a particular power of appointment. The specific reference requirement is not defined in the Uniform Act, but is discussed in the 40 Id., at page 23. 41 C.R.S. 15-2.5-304(2). 42 Comments, Uniform Powers of Appointment Act at page 21. 43 Id., at page 24. {00365743:2} 10

Comments and requires the powerholder to make specific reference to the clause in the donor s instrument that creates the power. 44 Example of specific reference requirement: Upon my spouse s death, the remainder of the Family Trust as it is then constituted shall be distributed to such persons or entities other than my spouse, my spouse s estate, my spouse s creditors or the creditors of my spouse s estate in such amounts and proportions, for such estates and interests and upon such terms, trusts, conditions and limitations as my spouse shall appoint by a will that makes specific reference to this Article of my will. Whether the substantial compliance doctrine, now codified in the Colorado Uniform Act, would have changed the outcome of Colorado case law is debatable. In Thompson v. Smith, 41 Colo. App. 366 (1978), the personal representative of the decedent s estate petitioned the court to determine whether the decedent, in the residuary clause of her will, had validly exercised a general testamentary power of appointment conferred on her by the provisions of her late husband s will. The husband s will directed that property be distributed in the manner and to the persons as appointed by his wife in her will, but only if such will specifically refers to this power. In her will, the wife used a blanket-exercise clause rather than a specific-reference clause by directing that the residue of her estate, including any property in which I hold a power of appointment, appointing said property to my residue) as follows: The Court of Appeals determined that the powerholder-wife did not make specific reference to her late husband s will and therefore her exercise was deemed invalid. The Comments recognize that whether the substantial compliance doctrine can meet the requirement of a specific reference clause is a difficult question. If it could be shown that the powerholder had knowledge of and intended to exercise the power, the blanket-exercise clause would be sufficient to exercise the power, unless it could be shown that the donor s intent was not merely to prevent an inadvertent exercise of the power but instead that the donor had a material purpose in insisting on the specific-reference requirement. 45 Practice Point: Avoid ambiguity. Do not rely on substantial compliance, meet all requirements of the donor, and specifically refer to clause of the instrument that creates the power of appointment. 3. Permissible Appointments, Appointments to Deceased Appointees, and Impermissible Appointments. a. Form of Appointment. C.R.S. 15-2.5-305 clarifies that a powerholder may, unless otherwise prohibited, make an appointment to a permissible appointee 44 Id., at page 24-25. 45 Id. at page 25. {00365743:2} 11

in any form, including in trust or by creating a new general power of appointment. The SRC Committee recommended revision of the Uniform Act to adopt a prior version of found in a draft version of the Uniform Act. Under the Colorado Uniform Act, unless the terms of the instrument creating the power of appointment manifest a contrary intent, the powerholder of a nongeneral power of appointment may: Make an appointment in any form, including an appointment in trust in favor of a permissible appointee; 46 Create a general or nongeneral power in a permissible appointee; 47 Example: Father creates a nongeneral power of appointment giving son the testamentary power to appoint the residue of a trust among son s descendants. Son s will appoints son s daughter, with the present power to appoint among son s descendants and son s wife. Create a nongeneral power in an impermissible appointee to appoint to one or more of the permissible appointees of the original nongeneral power. 48 Example: Father creates a nongeneral power of appointment giving son the testamentary power to appoint the residue of a trust among son s descendants. Son s will appoints son s wife with the present power to appoint among son s descendants. Practice Point: If a donor does not want a particular individual to ultimately become a permissible appointee, a statement to this effect should state that intent. b. Anti-lapse and deceased permissible appointees. The Uniform Act provides that an appointment to a deceased appointee is ineffective, but allows appointment to a descendant of a deceased appointee, even if the descendant is not a permissible appointee. C.R.S. 15-2.5-306 adds the requirement that the deceased permitted appointee must also be a descendant of one or more of the grandparents of the donor. Subsection 306 generally corresponds with Colorado s anti-lapse statutes, C.R.S. 15-11-603, 15-11-706 and 15-11-707. Colorado anti-lapse law only applies to family members. Descendents of a stranger are not meant to benefit by the provisions of the Colorado anti-lapse provisions. Therefore, the change to the Colorado Uniform Act mirrors the provisions of Colorado anti-lapse law. Example: Aunt Sarah creates a trust for her niece, Jane for life, giving her a nongeneral testamentary power of appointment to appoint the residue of the trust among 46 C. R. S. 15-2.5-305(3)(a). 47 C. R. S. 15-2.5-305(3)(b). 48 C. R. S. 15-2.5-305(3)(c). {00365743:2} 12

Aunt Sarah s nephews, Jack and Jordan, and Aunt Sarah s dear friend, Martha. All of Jack, Jordan and Aunt Sarah s friend, Martha, have died during Jane s life. If Jane appoints the residue to Jack and Jordan s children, the appointment is effective even though Jack and Jordan s children are impermissible appointees. However, if Jane appoints the residue to Martha s children, this is an ineffective appointment because Martha is not a descendant of one or more of the grandparents of Aunt Sarah. c. Appointments to Impermissible Appointees and an Appointment which is a Fraud on the Power. C.R.S. 15-2.5-307 states that the exercise of an appointment to an impermissible appointee is ineffective. Further, exercise to permissible appointees is impermissible to the extent that the appointment is a fraud on the power. The Comments refer to common devises that may be employed to commit a fraud on the power. These include an appointment conditioned on the appointee conferring a benefit on the powerholder or an impermissible appointee. 49 4. Selective Allocation Doctrine. If a powerholder uses the same instrument to exercise a power of appointment and to dispose of his or her own property, the doctrine of selective allocation provides that the property will be allocated in a permissible manner that best carries out the powerholder s intent. 50 Note that appointive property subject to a power of appointment cannot be used for the payment of the powerholder s creditors or estate taxes. Selective allocation is the methodology by which such creditor or tax payments are allocated away from appointive property. 5. Capture Doctrine. To the extent a powerholder of a general power of appointment makes an ineffective appointment, C.R.S. 15-2.5-309(a), provides that the gift-indefault clause controls. The gift-in-default clause 51 is the clause identifying the taker in default of appointment. 52 Example: If the descendant for whom the trust was created dies before complete distribution of the trust, the trustee shall distribute the remaining balance of the trust to any one or more of his creditors, as the deceased beneficiary of the trust may appoint by Will, expressly referring to this testamentary general of appointment. The trustee shall divide any unappointed balance of the trust, by representation, among the deceased beneficiary s descendants, by representation. [The takers in default are the deceased beneficiary s descendants, by representation.] What if there is no gift-in-default clause? If there is no gift-in-default clause or to the extent the gift-in-default clause is ineffective, property subject to a general power of appointment 49 Comments, Uniform Powers of Appointment Act, page 30. 50 C.R.S. 15-2.5-308. 51 Gift-in-default clause is defined at C.R.S. 15-2.5-102(7). 52 Taker in default clause is defined at C.R.S. 15-2.5-102(18). {00365743:2} 13

passes to the powerholder, if the powerholder is a permissible appointee and living 53 or if the powerholder is an impermissible appointee or not living, the powerholder s estate if the estate is a permissible appointee. 54 If neither of these requirements can be met, then the ineffectively appointed property passes to the donor or the donor s transferee or successor in interest. 55 Note that if the property subject to the power is in trust, the property remains in trust. 6. Disposition of Unappointed Property Under Released or Unexercised General Power. To the extent a powerholder releases or fails to exercise a general appointment, the rules are the same as applied in C.R.S. 15-2.5-309. C.R.S. 15-2.5-310 provides that the gift-in-default clause controls. 56 If there is no gift-in default clause or to the extent the gift-indefault clause is ineffective, the appointed property passes to the powerholder, if the powerholder is a permissible appointee and living 57 or if the powerholder is an impermissible appointee or not living, the powerholder s estate if the estate is a permissible appointee. 58 If neither of these requirements can be met, then the ineffectively appointed property passes to the donor or the donor s transferee or successor in interest. 59 Note that if the property subject to the power is in trust, the property remains in trust. 7. Disposition of Unappointed Property Under Released or Unexercised Nongeneral Power. To the extent a powerholder releases or fails to exercise a nongeneral appointment, the rules are somewhat different than a general power of appointment. As in C.R.S. 15-2.5-309, C.R.S. 15-2.5-311 provides that the gift-in-default clause controls. 60 If there is no gift-in default clause or to the extent the gift-in-default clause is ineffective, the appointed property passes to the permissible appointees if the permissible appointees are defined and limited and the donor has not manifested an intent that the permissible appointees shall receive the appointed property only so far as the powerholder elects to appoint it to them. 61 If neither of these requirements can be met, then the ineffectively appointed property passes to the donor or the donor s transferee or successor in interest. 62 Note that if the property subject to the power is in trust, the property remains in trust. 8. Disposition of Unappointed Property if Partial Appointment to Taker in Default. C.R.S. 15-2.5-312 provides that if a powerholder makes a valid partial appointment to a taker in default, unless the instrument creating or exercising the power of 53 C.R.S. 15-2.5-309(1)(b)(I)(A). 54 C.R.S. 15-2.5-309(1)(b)(I)(B). 55 C.R.S. 15-2.5-309(1)(b)(II). 56 C.R.S. 15-2.5-310(1)(a). 57 C.R.S. 15-2.5-310(1)(b)(I)(A). 58 C.R.S. 15-2.5-310(1)(b)(I)(B). 59 C.R.S. 15-2.5-310(1)(b)(II). 60 C.R.S. 15-2.5-311(1)(a). 61 C.R.S. 15-2.5-311(1)(b)(I). 62 C.R.S. 15-2.5-311(1)(b)(II). {00365743:2} 14

appointment manifest a different intent, the taker in default of appointment may share fully in unappointed property. Example: Mother executes a will providing that daughter, Anna, may exercise a power of appointment among Mother s three daughters, Anna, Beatrix and Connie, and Mother s will provides the takers in default are Anna, Betrix and Connie. Daughter exercises her power of appointment 1/3 to Anna, 1/3 to Beatrix and 1/3 to Anna s husband, Charles. The takers in default of appointment, Anna and Beatrix, are entitled to share the 1/3 ineffective appointment to Anna s husband. 9. Appointment to Taker in Default. C.R.S. 15-2.5-313 provides that if a powerholder makes a valid appointment to a taker in default, the power of appointment is deemed to not have been exercised. Why would this make a difference? It might make a difference in a state that provides that estate creditors of the powerholder will not have a claim on property subject to a power of appointment until the powerholder has exercised the power. 10. Powerholder s Authority to Revoke or Amend Exercise. C.R.S. 15-2.5-314 provides that an exercise of a power may not be revoked or amended unless either a) the instrument exercising the power is revocable and, if the power is nongeneral, the terms of the instrument creating the power do not prohibit the reservation, or b) the terms of the instrument creating the power of appointment provide that the exercise is revocable or amendable. D. Release or Disclaimer; Contracts to Exercise [C.R.S. 15-2.5-401 through 15-2.5-401] C.R.S. 15-2.5-401 provides that Colorado s law on disclaimers applies to both powerholders and permissible appointees. The provisions of the Colorado Uniform Disclaimer Act govern disclaimers of powers of appointment. (See, C.R.S. 15-11-1202, et seq.) C.R.S. 15-2.5-402 gives a powerholder authority to release a power unless prohibited by the donor. C.R.S. 15-2.5-403 provides methods for releasing powers of appointment. The SRC Subcommittee thought that the methods by which a powerholder may release a power provided in the Uniform Act were too restrictive. Specifically, the Uniform Act language limited a release to substantial compliance with a method provided in the terms of the instrument or by a record manifesting clear and convincing evidence. The SRC Committee, instead, encouraged adoption of the comments of the Restatement 3 rd Property, 20.3 to provide a multitude of methods by which a powerholder could release a power, which include: {00365743:2} 15

(1) delivering a writing declaring the extent to which the power is released to a person who could be adversely affected by an exercise of the power; (2) joining with some or all of the takers in default in making an otherwise effective transfer of an interest in the property that is subject to the power, in which case the power is released to the extent that a subsequent exercise of the power would defeat the interest transferred; (3) contracting with a person who could be adversely affected by an exercise of the power not to exercise the power, in which case the power is released to the extent that a subsequent exercise of the power would violate the terms of the contract; (4) communicating in any other appropriate manner an intent to release the power, in which case the power is released to the extent that a subsequent exercise of the power would be contrary to manifested intent; or (5) utilizing any method authorized by the donor or by applicable statute. C.R.S. 15-2.5-404 provides rules for revoking or amending a release. C.R.S. 15-2.5-405 and 15-2.5-406 govern contracts to exercise, or not to exercise, a power of appointment. A powerholder of a presently exercisable power of appointment may contract to exercise or not to exercise as long as the contract, when made, does not confer a benefit on a person other than a taker in default or a permissible appointee. Example: Mother executes a will giving her husband, Cecil, a life interest in a trust, and provides that Cecil may exercise a present power of appointment among Mother s three daughters, Anna, Beatrix and Connie. After Mother has died, Cecil contracts with Anna to appoint to Anna all of Mother s estate in exchange for the sum of $4,000. Because the contract confers a benefit on an impermissible appointee, Cecil, the appointment to Anna is invalid under C.R.S. 15-2.5-405. A powerholder of a power not presently exercisable may contract to exercise or not to exercise only if the powerholder is also the donor of the power and has reserved the power in the instrument creating the power. Example: Mother executes a irrevocable trust providing a sum of money for the life of her husband, Cecil. Cecil has a testamentary power to appoint the balance of the trust among Mother s three daughters, Anna, Beatrix and Connie. Before his death, Cecil contracts with Anna to appoint to Anna all of the balance of the trust in exchange for the sum of $4,000. Cecil was not the donor of the power, nor did he reserve the power in a revocable trust. Therefore the appointment is invalid. {00365743:2} 16

E. Creditor Claims on Appointive Property. [Reserved] 1. Background to Article 5. Article 5 of the Uniform Act was not enacted by the Colorado legislature and has been reserved for future study and recommendation. Article 5 deals with the rights of the creditors of a powerholder to property subject to a power of appointment. The provisions of Article 5 of the Uniform Act are designed to be consistent with Uniform Trust Code provisions. 63 The provisions also draw upon the Restatement 3 rd Property. 64 Very basically described, the Uniform Act determines a creditor s rights to appointive property based on the status of whether the power of appointment is general or nongeneral and whether the powerholder was also the donor. The Uniform Act provides that if a powerholder was also the donor, a creditor should have rights in the property subject to a general power of appointment of the donor-pwerholder. Further, if the donor contributed value to a general power of appointment, to the extent of the contribution, the property subject to the power should be reachable by creditors of the donorpowerholder. The Uniform Act generally also takes the position that property subject to a nongeneral power of appointment created by someone other than the donor is exempt from claims of the powerholder s creditors and from liability for expenses of administering the powerholder s estate. The SCR Subcommittee agrees with these positions. For purposes of determining whether a power of appointment is subject to ascertainable standards, the power is considered nongeneral and property subject to such power is not subject to creditor claims. 65 The SRC Subcommittee also agrees that applicable Colorado fraudulent transfer statutes should be applied to conveyances involving powers of appointment. A donor of a power of appointment should not be allowed to use a fraudulent transfer to avoid creditors. 2. Article 5 s Treatment of Presently Exercisable General Powers. The Uniform Act treats a presently exercisable general power of appointment (such as the power to withdraw) as an ownership-equivalent power. 66 To the extent the powerholder s property is insufficient, property subject to a presently exercisable general power of appointment is subject to the claims of the creditors of the powerholder. This position is contrary to established Colorado law. University National Bank v. Rhoadarmer, 827 P. 2d 561 (Colo App 1991); cert denied 1992, held that until a powerholder exercised her general power of appointment over a noncumulative power to withdraw up to $5,000 or 5% of the current trust, the powerholder had no property interest in the trust and the powerholder cannot be forced to exercise her power to withdraw. 63 Comments, Uniform Powers of Appointment Act, page 48. 64 The Restatement (Second) of Property: Wills and Other Donative Transfers treat the rights of creditors of powerholders significantly different than the Restatement 3 rd Property. 65 Comments, Uniform Powers of Appointment Act, page 47. 66 Id., at page 48. {00365743:2} 17

3. Article 5 s Treatment of Testamentary General Powers. The Uniform Act treats property subject to a testamentary general power of appointment as an ownershipequivalent as well. 67 Property subject to a testamentary general power of appointment is subject to creditor s claims against the powerholder s estate to the extent that the estate is insufficient. This position is also contrary to Colorado statute and case law. C.R.S. 15-15-103 gives creditors rights in property subject to certain nonprobate transfers if the probate estate is insufficient. The Colorado legislature has exempted however, transfers of property over which the transferor had a power of appointment. C.R.S. 15-15- 103 applies to general powers and to both the exercise and the non-exercise of that power. C.R.S. 15-15-103 provides, in pertinent part: (1)(a) (1)(a) Except as otherwise provided in paragraph (b) of this subsection (1), as used in this section, nonprobate transfer means a valid transfer effective at death by a transferor whose last domicile was in this state to the extent that the transferor immediately before death had power, acting alone, to prevent the transfer by revocation or withdrawal and instead to use the property for the benefit of the transferor or apply it to discharge claims against the transferor s probate estate. (b) This section shall not apply to: (I) A survivorship interest in joint tenancy real estate; and (II) Property transferred by the exercise or default in the exercise of a power of appointment, including a power of withdrawal, created by a person other than the transferor; (Emphasis added.) This statutory exemption is also reflected in Colorado case law. In Johnson v. Shriver, 216 P. 2d 653, 659 (Colo. 1950) the Court stated in dicta, We recognize the right of the donor of a power of appointment to condition his bounty as he sees fit, and the creditors of the donee of the power have no reason to complain that the donor did not give his bounty to them. 4. Will Colorado Adopt Article 5? The adoption of the Article 5 of the Uniform Act in its entirety would be contrary to established Colorado case law. Further, the Colorado legislature has conferred a statutory exemption for property subject to a testamentary general power of appointment as long as the power was created by a donor who was not the powerholder. 67 Id. {00365743:2} 18

IV. CONCLUSION Powers of appointment are routinely included in trusts drafted in Colorado, but prior to the enactment of the Colorado Uniform Powers of Appointment, there was minimal statutory law governing their use. Even though issues concerning powers of appointment determine substantial rights in property, Colorado case law was also sparce. The Colorado Uniform Power of Appointment Act gives practitioners a starting point to address questions that may arise in the creation of an estate plan and the administration of a decedent s estate that involve powers of appointment. {00365743:2} 19