Colorado § 15-2.5-307 - Impermissible appointment.

§ 15-2.5-307. Impermissible appointment.

(1) Except as otherwise provided in section 15-2.5-306, an exercise of a power of appointment in favor of an impermissible appointee is ineffective.

(2) An exercise of a power of appointment in favor of a permissible appointee is ineffective to the extent the appointment is a fraud on the power.

Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 778, § 1, effective July 1, 2015.

OFFICIAL COMMENT

The rules of this section apply to the extent the powerholder attempts to confer a beneficial interest in the appointive property on an impermissible appointee. For example, a nongeneral power may not be exercised in favor of the powerholder. And a nongeneral power in favor of the donor's descendants may not be exercised in favor of the donor's spouse (assuming the usual scenario wherein the spouse is not also a descendant).

To the extent an appointment is ineffective, it is invalid. But it bears emphasizing that an appointment that is partially valid remains partially valid. Partial invalidity does not doom the entire appointment.

The rules of this section do not apply to an appointment of a nonbeneficial interest—for example, the appointment of legal title to a trustee if the beneficial interest is held by permissible appointees.

Nor do the rules of this section prohibit beneficial appointment to an impermissible appointee if the intent to benefit the impermissible appointee is not the powerholder's but rather is the intent of a permissible appointee in whose favor the powerholder has decided to exercise the power. In other words, if the powerholder makes a decision to exercise the power in favor of a permissible appointee, the permissible appointee may request the powerholder to transfer the appointive assets directly to an impermissible appointee. The appointment directly to the impermissible appointee in this situation is effective, being treated for all purposes as an appointment first to the permissible appointee followed by a transfer by the permissible appointee to the impermissible appointee.

The donor of a power of appointment sets the range of permissible appointees by designating the permissible appointees of the power. The rules of this section are concerned with attempts by the powerholder to exceed that authority. Such an attempt is called a fraud on the power and is ineffective. The term "fraud on the power" is a well- accepted term of art. See Restatement Third of Property: Wills and Other Donative Transfers §§ 19.15 and 19.16.

Among the most common devices employed to commit a fraud on the power are: an appointment conditioned on the appointee conferring a benefit on an impermissible appointee; an appointment subject to a charge in favor of an impermissible appointee; an appointment upon a trust for the benefit of an impermissible appointee; an appointment in consideration of a benefit to an impermissible appointee; and an appointment primarily for the benefit of the permissible appointee's creditor if the creditor is an impermissible appointee. Each of these appointments is impermissible and ineffective.

The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 19.15 and 19.16 and the accompanying Commentary.