North Carolina § 31D-5-502 - Creditor claim; general power not created by power holder.

§ 31D-5-502. Creditor claim; general power not created by power holder.

Except as otherwise provided in subsection (b) of this section, and only when and to the extent that the power holder exercises the power, appointive property subject to a general power of appointment created by a person other than the power holder is subject to a claim of a creditor of: The power holder, to the extent the power holder's property is insufficient, if the power is presently exercisable. The power holder's estate, to the extent the estate is insufficient, subject to the right of a decedent to direct the source from which liabilities are paid. Subject to the provisions of G.S. 31D-5-504(c), a power of appointment created by a person other than the power holder which is subject to an ascertainable standard relating to an individual's health, education, support, or maintenance within the meaning of section 2041(b)(1)(A) or section 2514(c)(1) of the Internal Revenue Code, as amended, is treated for purposes of this Article as a nongeneral power. History (2015-205, s. 3(a).) NORTH CAROLINA COMMENT Subsection (a) of the Uniform Powers of Appointment Act was modified to add the language "and only when and to the extent that the powerholder exercises the power." This addition makes the rule consistent with the provisions of G.S. 36C-5-505(b)(1), regarding the claims of creditors over property subject to a power of withdrawal by a powerholder other than the settlor of a trust. See the North Carolina Comment to G.S. 31D-5-503. The rule codifies the common law rule that assets subject to an unexercised general power of appointment not created by the powerholder of the power cannot be reached by the powerholder's creditors. This common law rule was adopted by Restatement (Second) of Property § 13.2 (1986) stating that the rationale of the rule is that until the powerholder exercises the power, the powerholder has not accepted the control of the assets that gives the powerholder the equivalent of ownership. The Reporters Notes to section 13.2 cite case law of jurisdictions that generally have recognized the rule. However, the Reporters Notes also point out that cases do exist reaching the opposite result which is also the position taken in Restatement (Third) of Trusts § 56 note b. (2003) with respect to the presently exercisable general powers of appointment. Prior North Carolina common law on the subject of whether a creditor can reach assets subject to an unexercised general power of appointment is not clear. In holding that creditors could reach an exercised testamentary general power of appointment, the court in Roger v. Hinton , 62 N.C. 101 (1867), rehearing dismissed , 63 N.C. 78 (1868), recognized the common law rule only by implication, if at all. Subsection (b) providing that a power of appointment created by a person other than the powerholder which is subject to an ascertainable standard is treated as a nongeneral power has counterparts in other North Carolina statutes defining a power of appointment and providing that a power subject to an ascertainable standard is an exception. See G.S. 30-3.2 (2a); 36C-1-103(13). This exception is also applicable for federal estate tax purposes under § 2041(b)(1) of the Internal Revenue Code and for federal gift tax purposes under § 2514(c) of the Code. However, subsection (b) makes a noteworthy departure from these statutes by treating a power subject to an ascertainable standard as a nongeneral power only for purposes of this Article 5 governing creditors' rights. Because of the modifications made in this section of the Uniform Powers of Appointment Act the Official Comment was deleted, except for the following comment which applies to this section: Subsection (b) states an important exception. If the power is subject to an ascertainable standard within the meaning of 26 U.S.C. § 2041(b)(1)(A) or 26 U.S.C. § 2514(c)(1), the power is treated for purposes of this article as a nongeneral power, and the rights of the powerholder's creditors in the appointive property are governed by Sections 504(a) and (b).