OFFICIAL COMMENT

Paragraph (1) defines an appointee as the person to which a powerholder makes an appointment of appointive property. For the definition of the related term, "permissible appointee," see paragraph 11.

Paragraph (2) defines appointive property as the property or property interest subject to a power of appointment. The effective creation of a power of appointment requires that there be appointive property. See Section 201.

Paragraphs (3) and (17) introduce the distinction between blanket-exercise and specific-exercise clauses. A specific-exercise clause exercises and specifically refers to the particular power of appointment in question, using language such as the following: "I exercise the power of appointment conferred upon me by my father's will as follows: I appoint [fill in details of appointment]." In contrast, a blanket-exercise clause exercises "any" power of appointment the powerholder may have, appoints "any" property over which the powerholder may have a power of appointment, or disposes of all property subject to disposition by the powerholder. The use of specific-exercise clauses is encouraged; the use of blanket-exercise clauses is discouraged. See Section 301 and the accompanying Comment.

Paragraphs (4) and (14) define the donor and the powerholder. The donor is the person who created the power of appointment. The powerholder is the person in whom the power of appointment was conferred or in whom the power was reserved. The traditional, but potentially confusing, term for powerholder is "donee." See Restatement of Property § 319 (1940); Restatement Second of Property: Donative Transfers § 11.2 (1986); Restatement Third of Property: Wills and Other Donative Transfers § 17.2 (2011). In the case of a reserved power, the same person is both the donor and the powerholder.

Paragraph (5) introduces the distinction between exclusionary and nonexclusionary powers of appointment. An exclusionary power is one in which the donor has authorized the powerholder to appoint to any one or more of the permissible appointees to the exclusion of the other permissible appointees. For example, a power to appoint "to such of my descendants as the powerholder may select" is exclusionary, because the powerholder may appoint to any one or more of the donor's descendants to the exclusion of the other descendants. In contrast, a nonexclusionary power is one in which the powerholder cannot make an appointment that excludes any permissible appointee, or one or more designated permissible appointees, from a share of the appointive property. An example of a nonexclusionary power is a power "to appoint to all and every one of my children in such shares and proportions as the powerholder shall select." Here, the powerholder is not under a duty to exercise the power; but, if the powerholder does exercise the power, the appointment must abide by the power's nonexclusionary nature. See Sections 301 and 305. An instrument creating a power of appointment is construed as creating an exclusionary power unless the terms of the instrument manifest a contrary intent. See Section 203. The typical power of appointment is exclusionary. And in fact, only a power of appointment whose permissible appointees are "defined and limited" can be nonexclusionary. For elaboration of the well-accepted term of art "defined and limited," see Section 205 and the accompanying Comment.

Paragraphs (6) and (10) explain the distinction between general and nongeneral powers of appointment. A general power of appointment enables 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, regardless of whether the power is also exercisable in favor of others. A nongeneral power of appointment - sometimes called a "special" power of appointment - cannot be exercised in favor of the powerholder, the powerholder's estate, the creditors of the powerholder, or the creditors of the powerholder's estate. Estate planners often classify nongeneral powers as being either "broad" or "limited," depending on the range of permissible appointees. A power to appoint to anyone in the world except the powerholder, the powerholder's estate, and the creditors of either would be an example of a broad nongeneral power. In contrast, a power in the donor's spouse to appoint among the donor's descendants would be an example of a limited nongeneral power.

An instrument creating a power of appointment is construed as creating a general power unless the terms of the instrument manifest a contrary intent. See Section 203. A power to revoke, amend, or withdraw is a general power of appointment if it is exercisable in favor of the powerholder, the powerholder's estate, or the creditors of either. If the settlor of a trust empowers a trustee or another person to change a power of appointment from a general power into a nongeneral power, or vice versa, the power is either general or nongeneral depending on the scope of the power at any particular time.

Paragraph (7) defines the gift-in-default clause. In an instrument creating a power of appointment, the clause that identifies the taker in default is called the gift-in-default clause. A gift-in-default clause is not mandatory but is included in a well-drafted instrument.

Paragraphs (8) and (11) explain the distinction between impermissible and permissible appointees. The permissible appointees-known at common law as the "objects" - of a power of appointment may be narrowly defined (for example, "to such of the powerholder's descendants as the powerholder may select"), broadly defined (for example, "to such persons as the powerholder may select, except the powerholder, the powerholder's estate, the powerholder's creditors, or the creditors of the powerholder's estate"), or unlimited (for example, "to such persons as the powerholder may select"). A permissible appointee of a power of appointment does not, in that capacity, have a property interest that can be transferred to another. Otherwise, a permissible appointee could transform an impermissible appointee into a permissible appointee, exceeding the intended scope of the power and thereby violating the donor's intent. An appointment cannot benefit an impermissible appointee. See Section 307.

Paragraph (9) defines the term "instrument" as either a writing or a record, depending on the choice made by the enacting jurisdiction. The drafting committee had no clear preference between the two options. Interestingly, there is no pre-existing Uniform Law definition of "instrument" outside the commercial context. See Uniform Commercial Code §§ 3-104(b), 9-102(a)(47). The term is used without definition in, for example, the Uniform Probate Code, the Uniform Trust Code, and the Uniform Power of Attorney Act.

Paragraphs (12) and (16) contain the definitions of "person" and "record". With one exception, these are standard definitions approved by the Uniform Law Commission. The exception is that the word "trust" has been added to the definition of "person". Trust law in the United States is moving in the direction of viewing the trust as an entity, see Restatement Third of Trusts Introductory Note to Chapter 21, but does not yet do so.

Paragraph (13) defines a power of appointment. A power of appointment is a power enabling the powerholder, acting in a nonfiduciary capacity, to designate recipients of ownership interests in or powers of appointment over the appointive property. (Powers held in a fiduciary capacity, such a trustee's power to "decant" property from one trust to another, are the subject of other uniform legislation.)

A power to revoke or amend a trust or a power to withdraw income or principal from a trust is a power of appointment, whether the power is reserved by the transferor or conferred on another. See Restatement Third of Trusts § 56, Comment b. A power to withdraw income or principal subject to an ascertainable standard is a postponed power, exercisable upon the satisfaction of the ascertainable standard. See the Comment to paragraph (15), below.

A power to direct a trustee to distribute income or principal to another is a power of appointment.

In this act, a fiduciary distributive power is not a power of appointment. Fiduciary distributive powers include a trustee's power to distribute principal to or for the benefit of an income beneficiary, or for some other individual, or to pay income or principal to a designated beneficiary, or to distribute income or principal among a defined group of beneficiaries. Unlike the exercise of a power of appointment, the exercise of a fiduciary distributive power is subject to fiduciary standards. Unlike a power of appointment, a fiduciary distributive power does not lapse upon the death of the fiduciary, but survives in a successor fiduciary. Nevertheless, a fiduciary distributive power, like a power of appointment, cannot be validly exercised in favor of or for the benefit of someone who is not a permissible appointee.

A power over the management of property, sometimes called an administrative power, is not a power of appointment. For example, a power of sale coupled with a power to invest the proceeds of the sale, as commonly held by a trustee of a trust, is not a power of appointment but is an administrative power. A power of sale merely authorizes the person to substitute money for the property sold but does not authorize the person to alter the beneficial interests in the substituted property.

A power to designate or replace a trustee or other fiduciary is not a power of appointment. A power to designate or replace a trustee or other fiduciary involves property management and is a power to designate only the nonbeneficial holder of property.

A power of attorney is not a power of appointment. See Restatement of Property § 318, Comment h: "A power of attorney, in the commonest sense of that term, creates the relationship of principal and agent … and is terminated by the death of the [principal]. In both of these characteristics such a power differs from a power of appointment. The latter does not create an agency relationship and, except in the case of a power reserved in the donor, it is usually expected that it will be exercised after the donor's death." The distinction is carried forward in Restatement Third of Property: Wills and Other Donative Transfers § 17.1, Comment j. See also Uniform Power of Attorney Act §§ 102(7) (defining the holder of a power of attorney as an agent), 110(a)(1) (providing that the principal's death terminates a power of attorney).

A power to create or amend a beneficiary designation, for example with respect to the proceeds of a life insurance policy or of a pension plan, is not a power of appointment. An instrument creating a power of appointment must, among other things, transfer the appointive property. See Section 201; Restatement Third of Property: Wills and Other Donative Transfers § 18.1.

On the authority of a powerholder to exercise the power of appointment by creating a new power of appointment, see Section 305. If a powerholder exercises a power by creating another power, the powerholder of the first power is the donor of the second power, and the powerholder of the second power is the appointee of the first power.

Paragraph (15) introduces the distinctions among powers of appointment based upon when the power can be exercised. (A power is exercised when the instrument of exercise is effective. Thus, a power exercised by deed is exercised when the deed is effective. The law of deeds typically requires, among other things, intent, delivery, and acceptance. A power exercised by will is exercised when the will is effective - at the testator's death, not when the will is executed.)

There are three categories here: a power of appointment is presently exercisable, postponed, or testamentary.

A power of appointment is presently exercisable if it is exercisable at the time in question. Typically, a presently exercisable power of appointment is exercisable at the time in question during the powerholder's life and also at the powerholder's death, e.g., by the powerholder's will. Thus, a power of appointment that is exercisable "by deed or will" is a presently exercisable power. To take another example, a power of appointment exercisable by the powerholder's last unrevoked instrument in writing is a presently exercisable power, because the powerholder can make a present exercise irrevocable by explicitly so providing in the instrument exercising the power. See Restatement Third of Property: Wills and Other Donative Transfers § 17.4, Comment a.

A power of appointment is presently exercisable even though, at the time in question, the powerholder can only appoint an interest that is revocable or subject to a condition. For example, suppose that a trust directs the trustee to pay the income to the powerholder for life, then to distribute the principal by representation to the powerholder's surviving descendants. The trust further provides that, if the powerholder leaves no surviving descendants, the principal is to be distributed "to such individuals as the powerholder shall appoint." The powerholder has a presently exercisable power of appointment, but the appointive property is a remainder interest that is conditioned on the powerholder leaving no surviving descendants.

A power is a postponed power - sometimes known as a deferred power - if it is not yet exercisable until the occurrence of a specified event, the satisfaction of an ascertainable standard, or the passage of a specified time. A postponed power becomes presently exercisable upon the occurrence of the specified event, the satisfaction of the ascertainable standard, or the passage of the specified time. The second sentence in paragraph (15) is modeled on Uniform Power of Attorney Act § 102(8).

A power is testamentary if it is not exercisable during the powerholder's life but only in the powerholder's will or in a nontestamentary instrument that is functionally similar to the powerholder's will, such as the powerholder's revocable trust that remains revocable until the powerholder's death. On the ability of a powerholder to exercise a testamentary power of appointment in such a revocable trust, see Section 304 and the accompanying Comment. See also Restatement Third of Property: Wills and Other Donative Transfers § 19.9, Comment b.

Paragraph (18) defines a taker in default of appointment. A taker in default of appointment - often called the "taker in default" - has a property interest that can be transferred to another. If a taker in default transfers the interest to another, the transferee becomes a taker in default.

Paragraph (19) defines the "terms of the instrument" as the manifestation of the intent of the maker of the instrument regarding the instrument's provisions as expressed in the instrument or as may be established by other evidence that would be admissible in a legal proceeding. The maker of an instrument creating a power of appointment is the donor. The maker of an instrument exercising a power of appointment is the powerholder. This definition is a slightly modified version of the definition of "terms of a trust" in Uniform Trust Code § 103(18).

The definitions in this section are substantially consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 17.1 to 17.5 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The distinction between a general power of appointment defined in subdivision (6) of this section and a nongeneral power of appointment defined in subdivision (10) of this section has been recognized by, and is generally consistent with, prior North Carolina law although our courts have used different terminology in defining a general and nongeneral power of appointment. See, e.g., Wachovia Bank & Trust Co. v. Hunt , 267 N.C. 173, 176, 148 S.E.2d 41, 43 (1966); First Union Nat'l Bank v. Ingold , 136 N.C. App. 262, 265-6, 523 S.E.2d 725, 727-8 (1999).

The definitions provided in this section of the Uniform Powers of Appointment Act were modified in the following respects:

(i) In subdivision (9) in describing an "instrument" the drafters elected to use the term "writing" rather than "record" so as to be consistent with the selection and use of the term "writing" in other North Carolina statutes.

(ii) In subdivision (14) defining a "power of appointment" the following was added as the second sentence: "The power of appointment may be general or nongeneral and presently exercisable or not presently exercisable." This sentence was added to make it clearer that the term "power of appointment" includes all forms of powers of appointment, particularly in view of the definitions and uses of other less inclusive powers of appointment in other subdivisions of this section and in other sections of this Chapter.

(iii) In subdivision (15)a. the drafters inserted after the phrase "ascertainable standard" the phrase "relating to an individual's health, education and support or maintenance within the meaning of section 2041(b)(1)(A) or section 2514(c)(1) of the Internal Revenue Code, as amended" so as to tie the definition of "ascertainable standard" to that used in connection with powers of appointment in the Internal Revenue Code, as amended, the definition with which practitioners are most familiar.

(iv) Paragraph (16), defining the term "record," was deleted in view of the drafters' election to use the term "writing" instead of "record", and subdivisions (17), (18) and (19) were renumbered accordingly.

(v) Subdivision (19), renumbered as subdivision (18), was changed to substitute the phrase "in a judicial proceeding" for the phrase "by other evidence that would be admissible in a legal proceeding." This change was made to make the language consistent with that used in the definition of "terms of a trust" in subdivision (20) of G.S. 36C-1-103 of the North Carolina Uniform Trust Code.

OFFICIAL COMMENT

This section provides default rules for determining the law governing the creation and exercise of, and related matters concerning, a power of appointment.

Unless the terms of the instrument creating the power provide otherwise, the actions of the donor - the creation, revocation, or amendment of the power - are governed by the law of the donor's domicile; and the actions of the powerholder - the exercise, release, or disclaimer, or the revocation or amendment thereof - are governed by the law of the powerholder's domicile.

In each case, the domicile is determined at the relevant time . For example, a donor's creation of a power is governed by the law of the donor's domicile at the time of the power's creation; and a donor's amendment of a power is governed by the law of the donor's domicile at the time of the amendment. Similarly, a powerholder's exercise of a power is governed by the law of the powerholder's domicile at the time of the exercise.

The standard "public policy" rules of choice of law naturally continue to apply. See, for example, Restatement Second of Conflict of Laws § 187.

Paragraph (2) is a departure from older law. The older position was that the law of the donor's domicile governs acts both of the donor (such as the creation of the power) and of the powerholder (such as the exercise of the power). See, e.g., Beals v. State Street Bank & Trust Co ., 326 N.E.2d 896 (Mass. 1975); Bank of New York v. Black , 139 A.2d 393 (N.J. 1958).

Paragraph (2) adopts the modern view that acts of the powerholder should be governed by the law of the powerholder's domicile, because that is the law the powerholder (or the powerholder's lawyer) is likely to know. This approach is supported by Restatement Third of Property: Wills and Other Donative Transfers § 19.1, Comment e; Restatement Second of Conflict of Laws § 275, Comment c. It is also supported by Estate of McMullin , 417 A.2d 152 (Pa. 1980); White v. United States , 680 F.2d 1156 (7th Cir. 1982).

See generally, Restatement Third of Property: Wills and Other Donative Transfers § 19.1, Comment e; Restatement Second of Conflict of Laws § 275, Comment c.

NORTH CAROLINA COMMENT

Paragraph (1) of this section of the Uniform Powers of Appointment Act provided that the creation, revocation or amendment of the power is governed by the law of the donor's domicile at the relevant time. This paragraph was modified by designating it as subsection (a) providing that the creation, revocation and amendment of the power is governed by "either (1) the law of the jurisdiction designated in the terms of the trust creating the power, or (2) if no jurisdiction's law is designated in the terms of the instrument creating the power or if the jurisdiction's law so designated is contrary to a strong public policy of the law of the jurisdiction of the donor's domicile at the relevant time, then the law of the jurisdiction of the donor's domicile at the relevant time".

Paragraph (2) of this section of the Uniform Powers of Appointment Act provided that the exercise, release or disclaimer of the power, or the revocation or amendment of the exercise, release or disclaimer of the power, is governed by the laws of the powerholder's domicile at the relevant time. This paragraph was modified by redesignating it as subsection (b) providing that the exercise, release or disclaimer of the power, or the revocation or amendment of the exercise, release or disclaimer of the power, is governed by "either (1) the law of the jurisdiction designated in the terms of the instrument creating the power, or (2) if no jurisdiction's law is designated in the terms of the instrument creating the power or if the jurisdiction's law so designated is contrary to a strong public policy of the law of the jurisdiction of the powerholder's domicile at the relevant time, then the law of the jurisdiction of the powerholder's domicile at the relevant time".

The Comment of the Uniform Law Commissioners to this section states that the section provides default rules for determining the law governing the creation and exercise of, and related matters concerning, a power of appointment, that such rules apply "unless the terms of the instrument creating the power provide otherwise", and that "the standard 'public policy' rules of choice of law naturally continue to apply." Therefore, the drafters do not think that the modifications to this section of the Uniform Powers of Appointment Act make any substantive change in the governing law of the section, but the modifications do clarify what was intended and make the provisions of this section more parallel to and consistent with G.S. 36C-1-107 of the North Carolina Uniform Trust Code.

OFFICIAL COMMENT

This act codifies those portions of the law of powers of appointment that are most amenable to codification. The act is supplemented by the common law and principles of equity. To determine the common law and principles of equity in a particular state, a court might look first to prior case law in the state and to more general sources, such as the Restatement Third of Property: Wills and Other Donative Transfers. The common law is not static but includes the contemporary and evolving rules of decision developed by the courts in exercise of their power to adapt the law to new situations and changing conditions. It also includes the traditional and broad equitable jurisdiction of the court, which the act in no way restricts.

The statutory text of the act is also supplemented by these Comments, which, like the Comments to any Uniform Act, may be relied on as a guide for interpretation. See Stern Oil Co. v. Brown , 817 N.W.2d 395 (S.D. 2012) (interpreting Uniform Commercial Code); Isbell v. Commercial Investment Associates, Inc ., 644 S.E.2d 72 (Va. 2007) (interpreting Uniform Residential Landlord Tenant Act); Yale University v. Blumenthal , 621 A.2d 1304, 1307 (Conn. 1993) (interpreting Uniform Management of Institutional Funds Act); GMAC v. Anaya , 703 P.2d 169, 172 (N.M. 1985) (interpreting Uniform Commercial Code and describing the Comments as "persuasive" though "not binding"); Jack Davies, Legislative Law and Process in a Nutshell § 59-4 (3d ed. 2007).

The text of and Comment to this section are based on Uniform Trust Code § 106 and its accompanying Comment.

NORTH CAROLINA COMMENT

This section of the Uniform Powers of Appointment Act providing that the common law and principles of equity supplement this Chapter except to the extent modified by this Chapter or the "law of the state other than this Chapter" was modified to substitute "another statute of this State" for the "law of the state other than this Chapter." This change was made to make this section consistent with the identical language of G.S. 36C-1-106 of the North Carolina Uniform Trust Code.

OFFICIAL COMMENT

An instrument can only create a power of appointment if, under applicable law, the instrument itself is valid (or partially valid, see the next paragraph). Thus, for example, a will creating a power of appointment must be valid under the law - including choice of law (see Section 103) - applicable to wills. An inter vivos trust creating a power of appointment must be valid under the law - including choice of law (see Section 103) - applicable to inter vivos trusts. In part, this requirement of validity means that the instrument must be properly executed to the extent other law imposes requirements of execution. In addition, the creator of the instrument must have the capacity to execute the instrument and be free from undue influence and other wrongdoing. On questions of capacity, see Restatement Third of Property: Wills and Other Donative Transfers §§ 8.1 (Mental Capacity) and 8.2 (Minority). On freedom from undue influence and other wrongdoing, see, e.g., Restatement Third of Property §§ 8.3 (Undue Influence, Duress, or Fraud). The ability of an agent or guardian to create a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

The instrument need not be entirely valid. A partially valid instrument creates a power of appointment if the provisions creating the power are valid.

In addition to being valid in the relevant provisions, an instrument creating a power of appointment must transfer the appointive property. The creation of a power of appointment - unlike the creation of a power of attorney - requires a transfer. See Restatement Third of Property: Wills and Other Donative Transfers § 18.1 ("A power of appointment is created by a transfer that manifests an intent to create a power of appointment."). The term "transfer" includes a declaration by an owner of property that the owner holds the property as trustee. Such a declaration necessarily entails a transfer of legal title from the owner-as-owner to the owner-as-trustee; it also entails a transfer of all or some of the equitable interests in the property from the owner to the trust's beneficiaries. See Restatement Third of Property: Wills and Other Donative Transfers § 7.1, Comment a.

The requirement of a transfer presupposes that the donor has the right to transfer the property. An ordinary individual cannot create a power of appointment over the Brooklyn Bridge. Less fancifully, a donor cannot create a power of appointment if doing so would circumvent a valid restriction on the transfer of the property. For example, interests in unincorporated business organizations may have transfer restrictions arising from statute, contract, or both. A donor cannot use the creation of a power of appointment to circumvent a valid restriction on transfer.

The one exception to the requirement of a transfer is stated in subsection (b): by necessity, the requirement of a transfer does not apply to the creation of a power of appointment by the exercise of a power of appointment. On the ability of a powerholder to exercise the power by creating a new power of appointment, see Section 305.

In addition to the aforementioned requirements, an instrument creating a power of appointment must manifest the donor's intent to create in one or more powerholders a power of appointment over appointive property. This manifestation of intent does not require the use of particular words or phrases (such as "power of appointment"), but careful drafting should leave no doubt about the transferor's intent.

Sometimes the instrument is poorly drafted, raising the question whether the donor intended to create a power of appointment. In such a case, determining the donor's intent is a process of construction. On construction generally, see Chapters 10, 11, and 12 of the Restatement Third of Property: Wills and Other Donative Transfers. See also, more specifically, Restatement Third of Property: Wills and Other Donative Transfers § 18.1, Comments b-g, containing many illustrations of language ambiguous about whether a power of appointment was intended and, for each illustration, offering guidance about how to construe the language.

The creation of a power of appointment requires that there be a donor, a powerholder (who may be the same as the donor), and appointive property. There must also be one or more permissible appointees, though these need not be restricted; a powerholder can be authorized to appoint to anyone. A donor is not required to designate a taker in default of appointment, although a well-drafted instrument will specify one or more takers in default.

Subsection (c) states the well-accepted rule that a power of appointment cannot be created in an individual who is deceased. If the powerholder dies before the effective date of an instrument purporting to confer a power of appointment, the power is not created, and an attempted exercise of the power is ineffective. (The effective date of a power of appointment created in a donor's will is the donor's death, not when the donor executes the will. The effective date of a power of appointment created in a donor's inter vivos trust is the date the trust is established, even if the trust is revocable. See Restatement Third of Property: Wills and Other Donative Transfers § 19.11, Comments b and c.)

Nor is a power of appointment created if all the possible permissible appointees of the power are deceased when the transfer that is intended to create the power becomes legally operative. If all the possible permissible appointees of a power die after the power is created and before the powerholder exercises the power, the power terminates.

A power of appointment is not created if the permissible appointees are so indefinite that it is impossible to identify any person to whom the powerholder can appoint. If the description of the permissible appointees is such that one or more persons are identifiable, but it is not possible to determine whether other persons are within the description, the power is validly created, but an appointment can only be made to persons who can be identified as within the description of the permissible appointees.

Subsection (d) explains that a power of appointment can be conferred on an unborn or unascertained powerholder, subject to any applicable rule against perpetuities. This is a postponed power. The power arises on the powerholder's birth or ascertainment. The language creating the power as well as other factors such as the powerholder's capacity under applicable law determine whether the power is then presently exercisable, postponed, or testamentary.

The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 18.1 and 19.9 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The general rule of subsection (a) that a power of appointment is created only if the terms of the instrument creating the power manifest the donor's intent to create in the powerholder a power of appointment is generally consistent with North Carolina law. See First Union Nat'l Bank v. Ingold , 136 N.C. App. 262, 266, 523 S.E.2d 725, 728 (1999) where the court stated that "[t]he polar star which must serve as a guide for determining whether certain language creates a power of appointment is the intent underlying the settlor's inclusion of such language in the document."

The additional requirement of subsection (a) that the instrument creating the power must be valid, and, except with respect to the creation of a power of appointment by the exercise of a power of appointment, must transfer the appointed property, has not been specifically recognized by our courts.

Nor have our courts specifically recognized (i) the rule in subsection (b) that the requirement of a transfer of appointed property does not apply to the creation of an appointment by the exercise of a power of appointment, or (ii) the rule of subsection (c) that a power of appointment may not be created in a deceased person, although, as indicated in the Comment to the section by the Uniform Law Commissioners, these rules appear to be somewhat self-evident.

Section (d) of the Uniform Powers of Appointment Act was modified to include the words "or restraint on alienation" after the words "rule against perpetuity". Under G.S. 41-23(a), a trust is void if it suspends the power of alienation of the trust for longer than a permissible period of twenty-one (21) years after the death of an individual then alive or lives in being plus a period of twenty-one (21) years, but under G.S. 41-23(e) there is no suspension of the power of alienation by a trust if the trustee has the power to sell or there is an unlimited power to terminate the trust in any one or more persons. The provisions of G.S. 41-15, the Uniform Statutory Rule Against Perpetuities, and the common law rule against perpetuities do not apply to trusts created or administered in North Carolina. G.S. 41-23(h).

CASE NOTES

• I. In General.
• II. Decisions Under Former G.S. 31-4.

OFFICIAL COMMENT

An instrument can only create a power of appointment if, under applicable law, the instrument itself is valid (or partially valid, see the next paragraph). Thus, for example, a will creating a power of appointment must be valid under the law - including choice of law (see Section 103) - applicable to wills. An inter vivos trust creating a power of appointment must be valid under the law - including choice of law (see Section 103) - applicable to inter vivos trusts. In part, this requirement of validity means that the instrument must be properly executed to the extent other law imposes requirements of execution. In addition, the creator of the instrument must have the capacity to execute the instrument and be free from undue influence and other wrongdoing. On questions of capacity, see Restatement Third of Property: Wills and Other Donative Transfers §§ 8.1 (Mental Capacity) and 8.2 (Minority). On freedom from undue influence and other wrongdoing, see, e.g., Restatement Third of Property §§ 8.3 (Undue Influence, Duress, or Fraud). The ability of an agent or guardian to create a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

The instrument need not be entirely valid. A partially valid instrument creates a power of appointment if the provisions creating the power are valid.

In addition to being valid in the relevant provisions, an instrument creating a power of appointment must transfer the appointive property. The creation of a power of appointment - unlike the creation of a power of attorney - requires a transfer. See Restatement Third of Property: Wills and Other Donative Transfers § 18.1 ("A power of appointment is created by a transfer that manifests an intent to create a power of appointment."). The term "transfer" includes a declaration by an owner of property that the owner holds the property as trustee. Such a declaration necessarily entails a transfer of legal title from the owner-as-owner to the owner-as-trustee; it also entails a transfer of all or some of the equitable interests in the property from the owner to the trust's beneficiaries. See Restatement Third of Property: Wills and Other Donative Transfers § 7.1, Comment a.

The requirement of a transfer presupposes that the donor has the right to transfer the property. An ordinary individual cannot create a power of appointment over the Brooklyn Bridge. Less fancifully, a donor cannot create a power of appointment if doing so would circumvent a valid restriction on the transfer of the property. For example, interests in unincorporated business organizations may have transfer restrictions arising from statute, contract, or both. A donor cannot use the creation of a power of appointment to circumvent a valid restriction on transfer.

The one exception to the requirement of a transfer is stated in subsection (b): by necessity, the requirement of a transfer does not apply to the creation of a power of appointment by the exercise of a power of appointment. On the ability of a powerholder to exercise the power by creating a new power of appointment, see Section 305.

In addition to the aforementioned requirements, an instrument creating a power of appointment must manifest the donor's intent to create in one or more powerholders a power of appointment over appointive property. This manifestation of intent does not require the use of particular words or phrases (such as "power of appointment"), but careful drafting should leave no doubt about the transferor's intent.

Sometimes the instrument is poorly drafted, raising the question whether the donor intended to create a power of appointment. In such a case, determining the donor's intent is a process of construction. On construction generally, see Chapters 10, 11, and 12 of the Restatement Third of Property: Wills and Other Donative Transfers. See also, more specifically, Restatement Third of Property: Wills and Other Donative Transfers § 18.1, Comments b-g, containing many illustrations of language ambiguous about whether a power of appointment was intended and, for each illustration, offering guidance about how to construe the language.

The creation of a power of appointment requires that there be a donor, a powerholder (who may be the same as the donor), and appointive property. There must also be one or more permissible appointees, though these need not be restricted; a powerholder can be authorized to appoint to anyone. A donor is not required to designate a taker in default of appointment, although a well-drafted instrument will specify one or more takers in default.

Subsection (c) states the well-accepted rule that a power of appointment cannot be created in an individual who is deceased. If the powerholder dies before the effective date of an instrument purporting to confer a power of appointment, the power is not created, and an attempted exercise of the power is ineffective. (The effective date of a power of appointment created in a donor's will is the donor's death, not when the donor executes the will. The effective date of a power of appointment created in a donor's inter vivos trust is the date the trust is established, even if the trust is revocable. See Restatement Third of Property: Wills and Other Donative Transfers § 19.11, Comments b and c.)

Nor is a power of appointment created if all the possible permissible appointees of the power are deceased when the transfer that is intended to create the power becomes legally operative. If all the possible permissible appointees of a power die after the power is created and before the powerholder exercises the power, the power terminates.

A power of appointment is not created if the permissible appointees are so indefinite that it is impossible to identify any person to whom the powerholder can appoint. If the description of the permissible appointees is such that one or more persons are identifiable, but it is not possible to determine whether other persons are within the description, the power is validly created, but an appointment can only be made to persons who can be identified as within the description of the permissible appointees.

Subsection (d) explains that a power of appointment can be conferred on an unborn or unascertained powerholder, subject to any applicable rule against perpetuities. This is a postponed power. The power arises on the powerholder's birth or ascertainment. The language creating the power as well as other factors such as the powerholder's capacity under applicable law determine whether the power is then presently exercisable, postponed, or testamentary.

The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 18.1 and 19.9 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The general rule of subsection (a) that a power of appointment is created only if the terms of the instrument creating the power manifest the donor's intent to create in the powerholder a power of appointment is generally consistent with North Carolina law. See First Union Nat'l Bank v. Ingold , 136 N.C. App. 262, 266, 523 S.E.2d 725, 728 (1999) where the court stated that "[t]he polar star which must serve as a guide for determining whether certain language creates a power of appointment is the intent underlying the settlor's inclusion of such language in the document."

The additional requirement of subsection (a) that the instrument creating the power must be valid, and, except with respect to the creation of a power of appointment by the exercise of a power of appointment, must transfer the appointed property, has not been specifically recognized by our courts.

Nor have our courts specifically recognized (i) the rule in subsection (b) that the requirement of a transfer of appointed property does not apply to the creation of an appointment by the exercise of a power of appointment, or (ii) the rule of subsection (c) that a power of appointment may not be created in a deceased person, although, as indicated in the Comment to the section by the Uniform Law Commissioners, these rules appear to be somewhat self-evident.

Section (d) of the Uniform Powers of Appointment Act was modified to include the words "or restraint on alienation" after the words "rule against perpetuity". Under G.S. 41-23(a), a trust is void if it suspends the power of alienation of the trust for longer than a permissible period of twenty-one (21) years after the death of an individual then alive or lives in being plus a period of twenty-one (21) years, but under G.S. 41-23(e) there is no suspension of the power of alienation by a trust if the trustee has the power to sell or there is an unlimited power to terminate the trust in any one or more persons. The provisions of G.S. 41-15, the Uniform Statutory Rule Against Perpetuities, and the common law rule against perpetuities do not apply to trusts created or administered in North Carolina. G.S. 41-23(h).

Editor's Note. - Session Laws 2021-53, s. 6.1, made the repeal of former subdivision (a)(2) and subsection (b) by Session Laws 2021-53, s. 4.1, applicable to powers of appointment created on or after June 25, 2021.

Session Laws 2021-53, s. 5.1, contains a severability clause.

Effect of Amendments. - Session Laws 2021-53, s. 4.1, effective June 25, 2021, deleted former subdivision (a)(2) and subsection (b). For applicability, see editor's note.

CASE NOTES

• I. In General.
• II. Decisions Under Former G.S. 31-4.

OFFICIAL COMMENT

A power of appointment is nontransferable. The powerholder may not transfer the power to another person. (On the ability of the powerholder to exercise the power by conferring on a permissible appointee a new power of appointment over the appointive property, see Section 305.) If the powerholder dies without exercising or releasing the power, the power lapses. (If a power is held by multiple powerholders, which is rare, on the death of one powerholder that individual's power lapses but the power continues to be held by the surviving powerholders.) If the powerholder partially releases the power and dies without exercising the remaining part, the unexercised part of the power lapses. The power does not pass through the powerholder's estate to the powerholder's successors in interest.

The ability of an agent or guardian to create, revoke, exercise, or revoke the exercise of a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

The rule of this section is consistent with, and this Comment draws on, the Restatement Third of Property: Wills and Other Donative Transfers § 17.1, Comment b.

NORTH CAROLINA COMMENT

This section is new to North Carolina law. In Haslin v Kean's Adm'rs , 6 N.C. 309, 2 Mur. 309 (1818), a powerholder executed a document appearing to delegate the power of appointment to another individual, and the question before the court was whether the power had been exercised to defeat the claim of the taker in default. Without ruling that the transfer of the power was invalid, the court held that even assuming the powerholder had the right to delegate the power, the power had not been exercised either by the powerholder or by the individual to whom it was delegated.

OFFICIAL COMMENT

In determining which type of power of appointment is created, the general principle of construction, articulated in this section, is that a power falls into the category giving the powerholder the maximum discretionary authority except to the extent the terms of the instrument creating the power restrict the powerholder's authority. Maximum discretion confers on the powerholder the flexibility to alter the donor's disposition in response to changing conditions.

In accordance with this presumption of unlimited authority, a power is general unless the terms of the creating instrument specify that the powerholder cannot exercise the power in favor of the powerholder, the powerholder's estate, or the creditors of either. A power is presently exercisable unless the terms of the creating instrument specify that the power can only be exercised at some later time or in some document such as a will that only takes effect at some later time. A power is exclusionary unless the terms of the creating instrument specify that a permissible appointee must receive a certain amount or portion of the appointive assets if the power is exercised.

This general principle of construction applies, unless the terms of the instrument creating the power of appointment provide otherwise. A well-drafted instrument intended to create a nongeneral or testamentary or nonexclusionary power will use clear language to achieve the desired objective. Not all instruments are well-drafted, however. A court may have to construe the terms of the instrument to discern the donor's intent. For principles of construction applicable to the creation of a power of appointment, see Restatement Third of Property: Wills and Other Donative Transfers Chapters 17 and 18, and the accompanying Commentary, containing many examples.

NORTH CAROLINA COMMENT

The general principle of construction of this section that, unless the terms of the instrument creating the power manifest a contrary intent, the power is general is somewhat consistent with North Carolina law. See First Union Nat'l Bank v. Ingold , 136 N.C. App. 262, 266, 523 S.E.2d 725, 278 (1999), where the court stated that a power is general when there is no restriction imposed upon the donee as to the persons to whom the donee may appoint or the amounts to be given to such persons.

The drafters have found no prior North Carolina law specifically addressing the presumption that a power is exclusionary or presently exercisable.

OFFICIAL COMMENT

This section is designed to remedy a recurring drafting mistake. A testamentary power of appointment created in a defined and limited class that happens to include the powerholder is usually intended to be a nongeneral power. For example, a testamentary power created in one of the donor's descendants (such as the donor's child or grandchild) to appoint among the donor's "descendants" or "issue" is typically intended to be a nongeneral power. See, for example, PLR 201229005 (stating the ruling of the Internal Revenue Service that a testamentary power of appointment in the donor's son, exercisable in favor of the donor's "issue," is a nongeneral power for purposes of 26 U.S.C. § 2041). Accordingly, the presumption of this Section is that such a power is nongeneral.

On the meaning of the well-accepted term of art "defined and limited," see the Comment to Section 205. See also Restatement Third of Property: Wills and Other Donative Transfers § 17.5, Comment c.

NORTH CAROLINA COMMENT

This section, as noted in the Official Comment, is designed to remedy a recurring drafting error when a testamentary power created in a defined and limited class happens to include the powerholder but is intended to be a nongeneral power. The section has no counterpart in North Carolina law but is consistent with the general rule recognized in North Carolina that the intention of the powerholder in exercising the power governs. See, e.g., First Union Nat'l Bank v. Moss , 32 N.C. App. 499, 233 S.E.2d 88 (1977).

OFFICIAL COMMENT

Subsection (b) states a well-accepted and mandatory exception to the presumption of unlimited authority articulated in Section 203. If a power of appointment can be exercised only with the consent or joinder of an adverse party, the power is not a general power. An adverse party is an individual who has a substantial beneficial interest in the trust or other property arrangement that would be adversely affected by the exercise or nonexercise of the power in favor of the powerholder, the powerholder's estate, or the creditors of either. In this context, the word "substantial" is not subject to precise definition but must be determined in light of all the facts and circumstances. Consider the following examples.

Example 1 . D transferred property in trust, directing the trustee "to pay the income to D's son S for life, remainder in corpus to such person or persons as S, with the joinder of X, shall appoint; in default of appointment, remainder to X." S's power is not a general power because X meets the definition of an adverse party.

Example 2 . Same facts as Example 1, except that S's power is exercisable with the joinder of Y rather than with the joinder of X. Y has no property interest that could be adversely affected by the exercise of the power. Because Y is not an adverse party, S's power is general.

Whether the party whose consent or joinder is required is adverse or not is determined at the time in question. Consider the following example.

Example 3 . Same facts as Example 2, except that, one month after D's creation of the trust, X transfers the remainder interest to Y. Before the transfer, Y is not an adverse party and S's power is general. After the transfer, Y is an adverse party and S's power is nongeneral.

Subsection (c) also states a longstanding mandatory rule. Only a power of appointment whose permissible appointees are defined and limited can be nonexclusionary. "Defined and limited" in this context is a well-accepted term of art. For elaboration and examples, see Restatement Third of Property: Wills and Other Donative Transfers § 17.5, Comment c. In general, permissible appointees are "defined and limited" if they are defined and limited to a reasonable number. Typically, permissible appointees who are defined and limited are described in class-gift terms: a single-generation class such as "children," "grandchildren," "brothers and sisters," or "nieces and nephews," or a multiple-generation class such as "issue" or "descendants" or "heirs." Permissible appointees need not be described in class-gift terms to be defined and limited, however. The permissible appointees are also defined and limited if one or more permissible appointees are designated by name or otherwise individually identified.

If the permissible appointees are not defined and limited, the power is exclusionary irrespective of the donor's intent. A power exercisable, for example, in favor of "such person or persons other than the powerholder, the powerholder's estate, the creditors of the powerholder, and the creditors of the powerholder's estate" is an exclusionary power. An attempt by the donor to require the powerholder to appoint at least $X to each permissible appointee of the power is ineffective, because the permissible appointees of the power are so numerous that it would be administratively impossible to carry out the donor's expressed intent. The donor's expressed restriction is disregarded, and the powerholder may exclude any one or more of the permissible appointees in exercising the power.

In contrast, a power to appoint only to the powerholder's creditors or to the creditors of the powerholder's estate is a power in favor of a defined and limited class. Such a power could be nonexclusionary if, for example, the terms of the instrument creating the power provide that the power is a power to appoint "to such of the powerholder's estate creditors as the powerholder shall by will appoint, but if the powerholder exercises the power, the powerholder must appoint $X to a designated estate creditor or must appoint in full satisfaction of the powerholder's debt to a designated estate creditor."

If a power is determined to be nonexclusionary, it is to be inferred that the donor intends to require an appointment to confer a reasonable benefit upon each mandatory appointee. An appointment under which a mandatory appointee receives nothing, or only a nominal sum, violates this requirement and is forbidden. This doctrine is known as the doctrine forbidding illusory appointments. For elaboration, see Restatement Third of Property: Wills and Other Donative Transfers § 17.5, Comment j.

The terms of the instrument creating a power of appointment sometimes provide that no appointee shall receive any share in default of appointment unless the appointee consents to allow the amount of the appointment to be taken into account in calculating the fund to be distributed in default of appointment. This "hotchpot" language is used to minimize unintended inequalities of distribution among permissible appointees. Such a clause does not make the power nonexclusionary, because the terms do not prevent the powerholder from making an appointment that excludes a permissible appointee. See Restatement Third of Property: Wills and Other Donative Transfers § 17.5, Comment k.

The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 17.3 to 17.5 and the accompanying Introductory Note and Commentary.

NORTH CAROLINA COMMENT

The general rule of this section that if a powerholder may exercise a power of appointment only with a consent or joinder of an adverse party, the power is nongeneral has counterparts in other North Carolina statutes defining a power of appointment but providing that the rule of this section 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 section 2041(b)(1) of the Internal Revenue Code and for federal gift tax purposes under section 2514(c) of the Code. Although these statutes also provide an exception for powers limited by an ascertainable standard, this Chapter makes a noteworthy departure from them by treating a power subject to an ascertainable standard as a nongeneral power only for purposes of Article 5 governing creditors rights. See 31D-5-502(b).

OFFICIAL COMMENT

The donor of a power of appointment has the authority to revoke or amend the power only to the extent the instrument creating the power is revocable by the donor or the donor reserves a power of revocation or amendment in the instrument creating the power.

For example, the donor's power to revoke or amend a revocable inter vivos trust carries with it the authority to revoke or amend any power of appointment created in the trust. However, to the extent an exercise of the power removes appointive property from the trust, the donor's authority to revoke or amend the power is eliminated, unless the donor expressly reserved authority to revoke or amend any transfer from the trust after the transfer is completed.

If an irrevocable inter vivos trust confers a presently exercisable power on someone who is not the settlor of the trust (the settlor being the donor of the power), the donor lacks authority to revoke or amend the power, except to the extent the donor reserved the authority to do so. If the donor did reserve the authority to revoke or amend the power, that authority is only effective until the powerholder irrevocably exercises the power.

If the same individual is both the donor and the powerholder, the donor in his or her capacity as powerholder can indirectly revoke or amend the power by a partial or total release of the power. See Section 402. After the power has been irrevocably exercised, however, the donor as donor is in no different position in regard to revoking or amending the exercise of the power than the donor would be if the donor and powerholder were different individuals.

The ability of an agent or guardian to revoke or amend a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

Other law of the state may permit the reformation of an otherwise irrevocable instrument. See, for example, Uniform Probate Code § 2-805; Uniform Trust Code § 415.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 18.2 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters found no North Carolina cases addressing the rule of this section that the donor may revoke or amend a power of appointment only to the extent that the instrument creating the power is revocable by the donor or the donor reserves a power of revocation or amendment in the instrument creating the power.

OFFICIAL COMMENT

Paragraph (1) states the fundamental principle that an instrument can only exercise a power of appointment if the instrument, under applicable law, is valid (or partially valid, see the next paragraph). Thus, for example, a will exercising a power of appointment must be valid under the law - including choice of law (see Section 103) - applicable to wills. An inter vivos trust exercising a power of appointment must be valid under the law - including choice of law (see Section 103) - applicable to inter vivos trusts. In part, this means that the instrument must be properly executed to the extent other law imposes requirements of execution. In addition, the creator of the instrument must have the capacity to execute the instrument and be free from undue influence and other wrongdoing. On questions of capacity, see Restatement Third of Property: Wills and Other Donative Transfers §§ 8.1 (Mental Capacity) and 8.2 (Minority). On freedom from undue influence and other wrongdoing, see, e.g., Restatement Third of Property §§ 8.3 (Undue Influence, Duress, or Fraud). The ability of an agent or guardian to exercise a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

The instrument need not be entirely valid. A partially valid instrument can exercise a power of appointment if the provisions exercising the power are valid.

Paragraph (2) requires the terms of the instrument exercising the power of appointment to manifest the powerholder's intent to exercise the power of appointment. Whether a powerholder has manifested an intent to exercise a power of appointment is a question of construction. See generally Restatement Third of Property: Wills and Other Donative Transfers § 19.2. For example, a powerholder's disposition of appointive property may manifest an intent to exercise the power even though the powerholder does not refer to the power. See Restatement Third of Property: Wills and Other Donative Transfers § 19.3. Paragraph (2) also requires that the terms of the instrument exercising the power must, subject to Section 304, satisfy the requirements of exercise, if any, imposed by the donor.

Language expressing an intent to exercise a power is clearest if it makes a specific reference to the creating instrument and exercises the power in unequivocal terms and with careful attention to the requirements of exercise, if any, imposed by the donor.

The recommended method for exercising a power of appointment is by a specific-exercise clause, using language such as the following: "I exercise the power of appointment conferred upon me by [my father's will] as follows: I appoint [fill in details of appointment]."

Not recommended is a blanket-exercise clause, which purports to exercise "any" power of appointment the powerholder may have, using language such as the following: "I exercise any power of appointment I may have as follows: I appoint [fill in details of appointment]." Although a blanket-exercise clause does manifest an intent to exercise any power of appointment the powerholder may have, such a clause raises the often-litigated question of whether it satisfies the requirement of specific reference imposed by the donor in the instrument creating the power.

A blending clause purports to blend the appointive property with the powerholder's own property in a common disposition. The exercise portion of a blending clause can take the form of a specific exercise or, more commonly, a blanket exercise. For example, a clause providing "All the residue of my estate, including the property over which I have a power of appointment under my mother's will, I devise as follows" is a blending clause with a specific exercise. A clause providing "All the residue of my estate, including any property over which I may have a power of appointment, I devise as follows" is a blending clause with a blanket exercise.

This act aims to eliminate any significance attached to the use of a blending clause. A blending clause has traditionally been regarded as significant in the application of the doctrines of "selective allocation" and "capture." This act eliminates the significance of such a clause under those doctrines. See Sections 308 (selective allocation) and 309 (capture). The use of a blending clause is more likely to be the product of the forms used by the powerholder's lawyer than a deliberate decision by the powerholder to facilitate the application of the doctrines of selective allocation or capture.

If the powerholder decides not to exercise a specific power or any power that the powerholder might have, it is important to consider whether to depend on mere silence to produce a nonexercise or to take definitive action to assure a nonexercise. Definitive action can take the form of a release during life (see Section 402) or a nonexercise clause in the powerholder's will or other relevant instrument. A nonexercise clause can take the form of a specific-nonexercise clause (for example, "I do not exercise the power of appointment conferred on me by my father's trust") or the form of a blanket-nonexercise clause (for example, "I do not exercise any power of appointment I may have").

In certain circumstances, different consequences depend on the powerholder's choice. Under Section 302, a residuary clause in the powerholder's will is treated as manifesting an intent to exercise a general power in certain limited circumstances if the powerholder silently failed to exercise the power, but not if the powerholder released the power or refrained in a record from exercising it. Under Section 310, unappointed property passes to the powerholder's estate in certain limited circumstances if the powerholder silently failed to exercise a general power, but passes to the donor or to the donor's successors in interest if the powerholder released the power.

Paragraph (3) provides that the exercise is valid only to the extent the exercise is permissible. On permissible and impermissible exercise, see Sections 305 to 307.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 19.1, 19.8, and 19.9 and the accompanying Commentary.

NORTH CAROLINA COMMENT

Subdivision (1), at least with regard to the exercise of a power of appointment by will , is consistent with former G.S. 31-4 providing that no exercise of a power of appointment made by will shall be valid unless executed in the manner required by law for the execution of wills.

Subdivision (2) requiring that the terms of the instrument exercising the power manifest the powerholder's intent to exercise the power is consistent with prior North Carolina law. See, e.g., Wachovia Bank & Trust Co. v. Hunt , 267 N.C. 173, 176, 148 S.E.2d 41, 43 (1966) stating that to support the exercise of a power of appointment, the donee's intention to exercise the power must appear, expressly or impliedly, in the instrument. Several cases have cited the "generally accepted" rule that the question of the exercise of the power of appointment is largely one of intent and the instrument will be upheld as a valid exercise of the power where the intent to exercise the power can be plainly inferred, even though the instrument does not refer to the power where that reference is not required. See, e.g., Tocci v. Nowfall , 220 N.C. 550, 18 S.E.2d 225 (1942); Carraway v. Moseley , 152 N.C. 351, 67 S.E. 765 (1910).

Subdivision (3) is also consistent with prior North Carolina case law recognizing that a power must be exercised in accordance with the terms of the grant of the power, and so when a certain method of executing it is prescribed by the donor, the donee has no authority to exercise it by any other method. See Weston v. Hasty , 264 N.C. 432, 436-7, 142 S.E.2d 23, 27 (1965). Thus, for example, in order to exercise a power calling for specific reference to the power before the power may be exercised, some reference to the power must be made. First Citizens Bank & Trust Co. v. Fleming , 77 N.C. App. 568, 335 S.E.2d 515 (1985). And where the powerholder is required to make an appointment by will, the powerholder is limited to that method. See, e.g., Reid v. Boushall , 107 N.C. 345, 12 S.E. 324 (1890); Weston v. Hasty, supra , at 102 N.C. 437, 142 S.E.2d 27 quoting with approval language from a Georgia decision that in such a case any effort to exercise the power otherwise than by will was "nugatory." However, as provided in subdivision (3), the requirements imposed by the donor are subject to the provisions of G.S. 31D-3-304. See the North Carolina Comment to that section.

CASE NOTES

• I. In General.
• II. Decisions Under Former G.S. 31-43.

OFFICIAL COMMENT

This section addresses a question arising under Section 301(2)(A) - namely, whether the powerholder's intent to exercise a power of appointment is manifested by a garden-variety residuary clause such as "All the residue of my estate, I devise to ..." or "All of my estate, I devise to ...." (The section also applies to a comparable provision in the powerholder's revocable trust, such as a provision providing for the distribution of the trust corpus.) This section does not address the effect of a residuary clause that contains a blanket exercise or a specific exercise of a power of appointment. On blanket-exercise and specific-exercise clauses, see the Comment to Section 301.

The rule of this section is that in most circumstances a garden-variety residuary clause does not manifest an intent to exercise a power of appointment.

Such a clause manifests an intent to exercise a power of appointment only in the rare circumstance when (1) the terms of the instrument containing the residuary clause do not manifest a contrary intent, (2) the power in question is a general power exercisable in favor of the powerholder's estate, (3) there is no gift-in-default clause or it is ineffective, and (4) the powerholder did not release the power.

In a well-planned estate, a power of appointment, whether general or nongeneral, is accompanied by a gift in default. In a less carefully planned estate, on the other hand, there may be no gift-in-default clause. Or, if there is such a clause, the clause may be wholly or partly ineffective. To the extent the donor did not provide for takers in default or the gift-in-default clause is ineffective, it is more efficient to attribute to the powerholder the intent to exercise a general power in favor of the powerholder's residuary devisees. The principal benefit of attributing to the powerholder the intent to exercise a general power is that it allows the property to pass under the powerholder's will instead of as part of the donor's estate. Because the donor's death would normally have occurred before the powerholder died, some of the donor's successors might themselves have predeceased the powerholder. It is more efficient to avoid tracing the interest through multiple estates to determine who are the present successors. Moreover, to the extent the donor did not provide for takers in default, it is also more in accord with the donor's probable intent for the powerholder's residuary clause to be treated as exercising the power.

A gift-in-default clause can be ineffective or partially ineffective for a variety of reasons. The clause might cover only part of the appointive property. The clause might be invalid because it violates a rule against perpetuities or some other rule, or it might be ineffective because it conditioned the interest of the takers in default on an uncertain event that did not happen, the most common of which is an unsatisfied condition of survival.

Under no circumstance does a residuary clause manifest an intent to exercise a non general power. A residuary clause disposes of the powerholder's own property, and a nongeneral power is not an ownership-equivalent power. Similarly, a residuary clause does not manifest an intent to exercise a general power which is general only because it is exercisable in favor of the creditors of the powerholder or the creditors of the powerholder's estate.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.4 and the accompanying Commentary.

NORTH CAROLINA COMMENT

This section replaces former G.S. 31-43 providing that a general devise, such as a residuary clause, operates as an exercise of a general power unless a contrary intention appears in the will. This section requires that the residuary clause manifests an intention to exercise a general power, not only if the terms of the instrument do not manifest a contrary intent, but also if there is no gift-in-default clause or the clause is ineffective and the powerholder did not release the power.

Under former G.S. 31-43 the fact that there was a gift-in-default clause did not prevent, and was immaterial to, the exercise of a general power by the residuary clause. See, e.g., Schaeffer v. Haseltine , 228 N.C. 484, 465 S.E.2d 463 (1948); First Union Nat'l Bank v. Ingold , 136 N.C. App. 463, 523 S.E.2d 725 (1999). Thus, under prior North Carolina law a general power of appointment was exercised by a typical "garden-variety" residuary clause. In contrast, "[t]he rule of this section is that in most circumstances a garden-variety residuary clause does not manifest an intent to exercise a power of appointment" because that intent is manifested only in rare circumstances when there is no gift-in-default clause. See the Official Comment to this section.

OFFICIAL COMMENT

Nothing in the law prevents a powerholder from exercising an after-acquired power - in other words, from exercising a power in an instrument executed before acquiring the power. The only question is one of construction: whether the powerholder intended by the earlier instrument to exercise the after-acquired power. (The term "after-acquired power" in this section refers only to an after-acquired power acquired before the powerholder's death. A power of appointment cannot be conferred on a deceased powerholder. See Section 201.)

If the instrument of exercise specifically identifies the power to be exercised, then the question of construction is readily answered: the specific-exercise clause expresses an intent to exercise the power, whether the power is after-acquired or not. However, if the instrument of exercise uses only a blanket -exercise clause, the question of whether the powerholder intended to exercise an after-acquired power is often harder to answer. The presumptions in this section provide default rules of construction on the powerholder's likely intent.

Paragraph (1) states the general rule of this section. Unless the terms of the instrument indicate that the powerholder had a different intent, a blanket-exercise clause extends to a power of appointment acquired after the powerholder executed the instrument containing the blanket-exercise clause. General references to then-present circumstances, such as "all the powers I have" or similar expressions, are not a sufficient indication of an intent to exclude an after-acquired power. In contrast, more precise language, such as "all powers I have at the date of execution of this will," does indicate an intent to exclude an after-acquired power.

It is important to remember that even if the terms of the instrument manifest an intent to exercise an after-acquired power, the intent may be ineffective, for example if the terms of the donor's instrument creating the power manifest an intent to preclude such an exercise. In the absence of an indication to the contrary, however, it is inferred that the time of the execution of the powerholder's exercising instrument is immaterial to the donor. Even if the donor declares that the property shall pass to such persons as the powerholder "shall" or "may" appoint, these terms do not suffice to indicate an intent to exclude exercise by an instrument previously executed, because these words may be construed to refer to the time when the exercising document becomes effective.

Paragraph (2) states an exception to the general rule of paragraph (1). If the powerholder is also the donor, a blanket-exercise clause in a preexisting instrument is rebuttably presumed not to manifest an intent to exercise a power later reserved in another donative transfer, unless the donor/powerholder did not provide for a taker in default of appointment or the gift-in-default clause is ineffective.

The black-letter of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.6 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters found no prior North Carolina law specifically recognizing the rules of this section with regard to whether a blanket-exercise clause extends to an after-acquired power.

OFFICIAL COMMENT

This section adopts a substantial-compliance rule for donor-imposed formal requirements. This section only applies to formal requirements imposed by the donor . It does not apply to formal requirements imposed by law, such as the requirement that a will must be signed and attested. The section also does not apply to substantive requirements imposed by the donor, for example a requirement that the powerholder attain a certain age before the power is exercisable.

Whenever the donor imposes formal requirements with respect to the instrument of appointment that exceed the requirements imposed by law, the donor's purpose in imposing the additional requirements is relevant to whether the powerholder's attempted exercise satisfies the rule of this section. To the extent the powerholder's failure to comply with the additional requirements will not impair the accomplishment of a material purpose of the donor, the powerholder's attempted appointment in a manner that substantially complies with a donor-imposed requirement does not fail for lack of perfect compliance with that requirement.

For example, a donor's formal requirement that the power of appointment is exercisable "by will" may be satisfied by the powerholder's attempted exercise in a nontestamentary instrument that is functionally similar to a will, such as the powerholder's revocable trust that remains revocable until the powerholder's death. See Restatement Third of Property: Wills and Other Donative Transfers § 19.9, Comment b ("Because a revocable trust operates in substance as a will, a power of appointment exercisable "by will" can be exercised in a revocable-trust document, as long as the revocable trust remained revocable at the [powerholder]'s death.").

A formal requirement commonly imposed by the donor is that, in order to be effective, the powerholder's attempted exercise must make specific reference to the power. Specific-reference clauses were a pre-1942 invention designed to prevent an inadvertent exercise of a general power. The federal estate tax law then provided that the value of property subject to a general power was included in the powerholder's gross estate if the general power was exercised. The idea of requiring specific reference was designed to thwart unintended exercise and, hence, estate taxation.

The federal estate tax law has changed. For a general power created after October 21, 1942, estate tax consequences do not depend on whether the power is exercised.

Nevertheless, donors continue to impose specific-reference requirements. Because the original purpose of the specific-reference requirement was to prevent an inadvertent exercise of the power, it seems reasonable to presume that that this is still the donor's purpose in doing so. Consequently, a specific-reference requirement still overrides any applicable state law that presumes that an ordinary residuary clause was intended to exercise a general power. Put differently: An ordinary residuary clause may manifest the powerholder's intent to exercise (under Section 301(2)(A)) but does not satisfy the requirements of exercise if the donor imposed a specific-reference requirement (this section and Section 301(2)(B)).

A more difficult question is whether a blanket-exercise clause satisfies a specific-reference requirement. 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. In such a case, the possibility of applying Uniform Probate Code § 2-805 or Restatement Third of Property: Wills and Other Donative Transfers § 12.1 to reform the powerholder's attempted appointment to insert the required specific reference should be explored.

This rule of this section is consistent with, but an elaboration of, Uniform Probate Code § 2-704: "If a governing instrument creating a power of appointment expressly requires that the power be exercised by a reference, an express reference, or a specific reference, to the power or its source, it is presumed that the donor's intent, in requiring that the [powerholder] exercise the power by making reference to the particular power or to the creating instrument, was to prevent an inadvertent exercise of the power."

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.10 and the accompanying Commentary.

NORTH CAROLINA COMMENT

This section is generally consistent with prior North Carolina law at least with respect to the requirement that the exercise of the power refer specifically to the power. See e.g., First Union Nat'l Bank v. Moss , 32 N.C. App. 499, 233 S.E.2d 88 (1977) where the will provided that the donee must exercise this power by will "specifically referring to this power of appointment," and the court held that the will devising any property over which the donee may have "any power of appointment" (known as a blanket-exercise clause) was a valid exercise of the power under circumstances showing that this was the intent of the powerholder. The rationale of this decision is the same as that of the Official Comment to this section that a blanket-exercise of a power of appointment is sufficient to exercise a power if it could be shown that the powerholder had knowledge of the power and intended to exercise it.

This section appears to differ from prior North Carolina law indicating that if a power of appointment was required to be exercised by will, then it must be satisfied by the exercise of the power by will and no other method. See the North Carolina Comment to G.S. 31D-3-301 citing cases so concluding. However, the Official Comment to this section states that, as an example of this section, a donor's formal requirement that the power of appointment is exercised "by will" may be satisfied by the powerholder's exercise in a nontestamentary instrument that is functionally similar to a will, such as a powerholder's revocable trust that remains revocable until the powerholder's death. The court in Reid v. Boushall , 107 N.C. 345, 12 S.E. 324 (1890) seemed to recognize this rule in stating that "[a]lthough a will made in execution of a power is not strictly a will, but simply a declaration of a use, yet it so far retains the properties of a will as to be ambulatory until the death of the testator and consequently revocable in the same manner as an ordinary testamentary instrument."

CASE NOTES

Intent. - Because an attorney and his law firm could not show that each element of the affirmative defense of collateral estoppel was satisfied, the trial court did not err in denying their motion for summary judgment and granting beneficiaries and a trust partial summary judgment; the attorney and law firm could not show with clarity and certainty that the issue of the settlor's intent was actually and necessarily determined in the declaratory action or reformation claim. McElhaney v. Orsbon & Fenninger, LLP, - N.C. App. - , - S.E.2d - (July 6, 2021).

OFFICIAL COMMENT

When a donor creates a general power under which an appointment can be made outright to the powerholder or the powerholder's estate, the necessary implication is that the powerholder may accomplish by an appointment to others whatever the powerholder could accomplish by first appointing to himself and then disposing of the property, including a disposition in trust or in the creation of a further power of appointment.

A general power to appoint only to the powerholder (even though it says "and to no one else") does not prevent the powerholder from exercising the power in favor of others. There is no reason to require the powerholder to transform the appointive assets into owned property and then, in a second step, to dispose of the owned property. Likewise, a general power to appoint only to the powerholder's estate (even though it says "and to no one else") does not prevent an exercise of the power by will in favor of others. There is no reason to require the powerholder to transform the appointive assets into estate property and then, in a second step, to dispose of the estate property by will.

Similarly, a general power to appoint to the powerholder may purport to allow only one exercise of the power, but such a restriction is ineffective and does not prevent multiple partial exercises of the power. To take another example, a general power to appoint to the powerholder or to the powerholder's estate may purport to restrict appointment to outright interests not in trust, but such a restriction is ineffective and does not prevent an appointment in trust.

An additional example will drive home the point. A general power to appoint to the powerholder or to the powerholder's estate may purport to forbid the powerholder from imposing conditions on the enjoyment of the property by the appointee. Such a restriction is ineffective and does not prevent an appointment subject to such conditions.

As stated in subsection (b), however, a general power to appoint only to the powerholder's creditors or the creditors of the powerholder's estate permits an appointment only to those creditors.

Except to the extent the terms of the instrument creating the power manifest a contrary intent, the powerholder of a nongeneral power has the same breadth of discretion in appointment to permissible appointees that the powerholder has in the disposition of the powerholder's owned property to permissible appointees of the power.

Thus, unless the terms of the instrument creating the power manifest a contrary intent, the powerholder of a nongeneral power has the authority to exercise the power by an appointment in trust. In order to manifest a contrary intent, the terms of the instrument creating the power must specifically prohibit an appointment in trust. So, for example, a power to appoint "to" the powerholder's descendants includes the authority to appoint in trust for the benefit of one or more of those descendants.

Similarly, unless the terms of the instrument creating the power manifest a contrary intent, the powerholder of a nongeneral power has the authority to exercise the power by creating a general power in a permissible appointee. The rationale for this rule is a straightforward application of the maxim that the greater includes the lesser. A powerholder of a nongeneral power may appoint outright to a permissible appointee, so the powerholder may instead create in a permissible appointee a general power.

And finally, unless the terms of the instrument creating the power manifest a contrary intent, the powerholder of a nongeneral power may exercise the power by creating a new nongeneral power in any person, whether or not a permissible appointee, to appoint to some or all of the permissible appointees of the original nongeneral power. In order to manifest a contrary intent, the terms of the instrument creating the power must prohibit the creation of such powers. Language merely conferring the power of appointment on the powerholder does not suffice.

The rules of subsection (c) are default rules. The terms of the instrument creating the power may manifest a contrary intent. For example, a donor may choose to loosen the restriction in subsection (c)(3) by authorizing the powerholder of a nongeneral power to create a new nongeneral power with broader permissible appointees. Consider the following examples.

Example 1 . D creates a nongeneral power in D's child, P1, to appoint among D's descendants. Under the default rule of subsection (c)(3), P1 may exercise this power to create a new nongeneral power in D's child, P2. Unless the terms of D's instrument manifest a contrary intent, however, the permissible appointees of P2's nongeneral power cannot be broader than the permissible appointees of P1's nongeneral power.

Example 2 . Same facts as in Example 1, except that D's instrument states: "The nongeneral power of appointment granted to P1 may be exercised to create in one or more of my descendants a new nongeneral power. This new nongeneral power may have permissible appointees as broad as P1 sees fit." On these facts, the default rule of subsection (c)(3) is overridden by the terms of D's instrument. The permissible appointees of P2's nongeneral power may be broader than the permissible appointees of P1's nongeneral power.

The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 19.13 and 19.14 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters found no prior North Carolina law specifically recognizing the rules of this section regarding permissible appointments.

§ 31D-3-305. Permissible appointment.

1. If a power holder of a general power of appointment permits appointment to the power holder or the power holder's estate, the power holder may make any appointment, including an appointment in trust or an appointment that creates a new power of appointment that the power holder could make in disposing of the power holder's own property.
2. If a power holder of a general power of appointment permits appointment only to the creditors of the power holder or the creditors of the power holder's estate, or both, the power holder may appoint only to those creditors.
3. Unless the terms of the instrument creating a power of appointment manifest a contrary intent, the power holder of a nongeneral power may:
   1. Make an appointment in any form, including an appointment in trust, in favor of a permissible appointee.
   2. Create a general power in a permissible appointee.
   3. Create a nongeneral power in any person to appoint to one or more of the permissible appointees of the original nongeneral power.
   4. Create a nongeneral power in a permissible appointee to appoint to one or more persons if the permissible appointees of the new nongeneral power include one or more permissible appointees of the original nongeneral power.

History

(2015-205, s. 3(a); 2021-53, s. 4.2.)

OFFICIAL COMMENT

When a donor creates a general power under which an appointment can be made outright to the powerholder or the powerholder's estate, the necessary implication is that the powerholder may accomplish by an appointment to others whatever the powerholder could accomplish by first appointing to himself and then disposing of the property, including a disposition in trust or in the creation of a further power of appointment.

A general power to appoint only to the powerholder (even though it says "and to no one else") does not prevent the powerholder from exercising the power in favor of others. There is no reason to require the powerholder to transform the appointive assets into owned property and then, in a second step, to dispose of the owned property. Likewise, a general power to appoint only to the powerholder's estate (even though it says "and to no one else") does not prevent an exercise of the power by will in favor of others. There is no reason to require the powerholder to transform the appointive assets into estate property and then, in a second step, to dispose of the estate property by will.

Similarly, a general power to appoint to the powerholder may purport to allow only one exercise of the power, but such a restriction is ineffective and does not prevent multiple partial exercises of the power. To take another example, a general power to appoint to the powerholder or to the powerholder's estate may purport to restrict appointment to outright interests not in trust, but such a restriction is ineffective and does not prevent an appointment in trust.

An additional example will drive home the point. A general power to appoint to the powerholder or to the powerholder's estate may purport to forbid the powerholder from imposing conditions on the enjoyment of the property by the appointee. Such a restriction is ineffective and does not prevent an appointment subject to such conditions.

As stated in subsection (b), however, a general power to appoint only to the powerholder's creditors or the creditors of the powerholder's estate permits an appointment only to those creditors.

Except to the extent the terms of the instrument creating the power manifest a contrary intent, the powerholder of a nongeneral power has the same breadth of discretion in appointment to permissible appointees that the powerholder has in the disposition of the powerholder's owned property to permissible appointees of the power.

Thus, unless the terms of the instrument creating the power manifest a contrary intent, the powerholder of a nongeneral power has the authority to exercise the power by an appointment in trust. In order to manifest a contrary intent, the terms of the instrument creating the power must specifically prohibit an appointment in trust. So, for example, a power to appoint "to" the powerholder's descendants includes the authority to appoint in trust for the benefit of one or more of those descendants.

Similarly, unless the terms of the instrument creating the power manifest a contrary intent, the powerholder of a nongeneral power has the authority to exercise the power by creating a general power in a permissible appointee. The rationale for this rule is a straightforward application of the maxim that the greater includes the lesser. A powerholder of a nongeneral power may appoint outright to a permissible appointee, so the powerholder may instead create in a permissible appointee a general power.

And finally, unless the terms of the instrument creating the power manifest a contrary intent, the powerholder of a nongeneral power may exercise the power by creating a new nongeneral power in any person, whether or not a permissible appointee, to appoint to some or all of the permissible appointees of the original nongeneral power. In order to manifest a contrary intent, the terms of the instrument creating the power must prohibit the creation of such powers. Language merely conferring the power of appointment on the powerholder does not suffice.

The rules of subsection (c) are default rules. The terms of the instrument creating the power may manifest a contrary intent. For example, a donor may choose to loosen the restriction in subsection (c)(3) by authorizing the powerholder of a nongeneral power to create a new nongeneral power with broader permissible appointees. Consider the following examples.

Example 1 . D creates a nongeneral power in D's child, P1, to appoint among D's descendants. Under the default rule of subsection (c)(3), P1 may exercise this power to create a new nongeneral power in D's child, P2. Unless the terms of D's instrument manifest a contrary intent, however, the permissible appointees of P2's nongeneral power cannot be broader than the permissible appointees of P1's nongeneral power.

Example 2 . Same facts as in Example 1, except that D's instrument states: "The nongeneral power of appointment granted to P1 may be exercised to create in one or more of my descendants a new nongeneral power. This new nongeneral power may have permissible appointees as broad as P1 sees fit." On these facts, the default rule of subsection (c)(3) is overridden by the terms of D's instrument. The permissible appointees of P2's nongeneral power may be broader than the permissible appointees of P1's nongeneral power.

The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 19.13 and 19.14 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters found no prior North Carolina law specifically recognizing the rules of this section regarding permissible appointments.

Editor's Note. - Session Laws 2021-53, s. 6.1, made the redesignation and rewriting of former subsection (d) as present subdivision (c)(3) and the addition of subdivision (c)(4) by Session Laws 2021-53, s. 4.2, applicable to the exercise, on or after June 25, 2021, of powers of appointment created before, on, or after that date.

Session Laws 2021-53, s. 5.1, contains a severability clause.

Effect of Amendments. - Session Laws 2021-53, s. 4.2, effective June 25, 2021, redesignated and rewrote former subsection (d) as present subdivision (c)(3); and added subdivision (c)(4). For applicability, see editor's note.

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 non beneficial 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.

NORTH CAROLINA COMMENT

Subsection (a) that an exercise of the power in favor of an impermissible appointee is invalid appears to be self-evident although the Official Comment on this subject is instructive. The drafters omitted the opening clause of subsection (a) of the Uniform Powers of Appointment Act providing "Except as provided in Section 306", which refers to application of the state anti-lapse statute to appointees, because the North Carolina anti-lapse statute, G.S. 31-42, does not apply to appointees. See the North Carolina Comment to G.S. 31D-3-306.

Subsection (b) is consistent with prior North Carolina case law recognizing that questions of fraud may arise upon the exercise of a power of appointment. See Norfleet v. Hawkins , 93 N.C. 392 (1885) where the court held that where a wife exercised a power of appointment in favor of her husband, whether the appointment was fraudulent was a question of fact for the jury, and there were no facts showing that the exercise of the power was fraudulent.

OFFICIAL COMMENT

The rule of this section is commonly known as the doctrine of selective allocation. This doctrine applies if the powerholder uses the same instrument to exercise a power of appointment and to dispose of property that the powerholder owns. For purposes of this section, the powerholder's will, any codicils to the powerholder's will, and any revocable trust created by the powerholder that did not become irrevocable before the powerholder's death are treated as the same instrument.

The doctrine of selective allocation provides that the owned and appointive property shall be allocated in the permissible manner that best carries out the powerholder's intent.

One situation that often calls for selective allocation is when the powerholder disposes of property to permissible and impermissible appointees. By allocating owned assets to the dispositions favoring impermissible appointees and allocating appointive assets to permissible appointees, the appointment is rendered effective. Consider the following example, drawn from the Restatement Third of Property: Wills and Other Donative Transfers.

Example . D died, leaving a will that devised property worth $100,000 to T in trust. T is directed to pay the net income to S (Donor's son) for life and then "to pay the principal to S's descendants as S shall by will appoint, and in default of appointment to pay the principal by representation to S's descendants then living, and if no descendant of S is then living, to pay the principal to X-Charity." S dies. The property over which S has the nongeneral power is worth $200,000 at his death. S's owned property at his death is worth $800,000. S's will provides as follows: "All property I own or over which I have any power of appointment shall be used first to pay my debts, expenses of administration, and death taxes, and the balance I give outright to my daughters." S's debts plus the death taxes payable on S's death plus the expenses of administering S's estate total $200,000. If S's owned property is allocated ratably to the payment of such $200,000, one-fifth of the $200,000 would be an ineffective appointment, because it would be to impermissible appointees. That one-fifth of $200,000 ($40,000 of the appointive assets) would pass in default of appointment, and the owned property would have to pick up the full payment of the debts, taxes, and expenses of administration. A selective allocation in the first instance of owned assets to the payment of debts, taxes, and expenses of administration leaves the appointive assets appointed only to permissible appointees of the nongeneral power and nothing passes in default of appointment.

The result of applying selective allocation is always one that the powerholder could have provided for in specific language, and one that the powerholder most probably would have provided for had he or she been aware of the difficulties inherent in the dispositive scheme. By the rule of selective allocation, courts undertake to prevent the dispositive plan from being frustrated by the ineptness of the powerholder or the powerholder's lawyer. For an early case adopting selective allocation, see Roe v. Tranmer, 2 Wils. 75, 95 Eng. Rep. 694 (C.P. 1757).

For further discussion of selective allocation, and illustrations of its application to various fact-patterns, see Restatement Third of Property: Wills and Other Donative Transfers § 19.19 and the accompanying Commentary. This rule of this Section is consistent with, and this Comment draws on, that Restatement.

On the distinction between selective allocation (a rule of construction based on the assumed intent of the powerholder) and the process sometimes known as "marshaling" (an outgrowth of general equitable principles), see the Restatement Second of Property: Donative Transfers, especially the Introductory Note to Chapter 22.

NORTH CAROLINA COMMENT

This section providing the rule known as the doctrine of selective allocation has no equivalent in prior North Carolina law.

OFFICIAL COMMENT

This section applies when the powerholder of a general power makes an ineffective appointment. This section does not apply when the powerholder of a general power fails to exercise or releases the power. (On such fact-patterns, see instead Section 310.)

Nor does this section apply to an ineffective exercise of a power of revocation, amendment, or withdrawal - in each case, a power pertaining to a trust. To the extent a powerholder of one of these types of powers makes an ineffective appointment, the ineffectively appointed property remains in the trust.

The central rule of this section - in paragraph (1) and subparagraph (2)(A) - is a modern variation of the so-called "capture doctrine" adopted by a small body of case law and followed in Restatement Second of Property: Donative Transfers § 23.2. Under that doctrine, the ineffectively appointed property passed to the powerholder or the powerholder's estate, but only if the ineffective appointment manifested an intent to assume control of the appointive property "for all purposes" and not merely for the limited purpose of giving effect to the attempted appointment. If the ineffective appointment manifested such an intent, the ineffective appointment was treated as an implied alternative appointment to the powerholder or the powerholder's estate, and thus took effect even if the donor provided for takers in default and one or more of the takers in default were otherwise entitled to take.

The capture doctrine was developed at a time when the donor's gift-in-default clause was considered an afterthought, inserted just in case the powerholder failed to exercise the power. Today, the donor's gift-in-default clause is typically carefully drafted and intended to take effect, unless circumstances change that would cause the powerholder to exercise the power. Consequently, if the powerholder exercises the power effectively, the exercise divests the interest of the takers in default. But if the powerholder makes an ineffective appointment, the powerholder's intent regarding the disposition of the ineffectively appointed property is problematic.

Whether or not the ineffective appointment manifested an intent to assume control of the appointive property "for all purposes" often depended on nothing more than whether the ineffective appointment was contained in a blending clause. The use of a blending clause rather than a direct-exercise clause, however, is typically the product of the drafting lawyer's forms rather than a deliberate choice of the powerholder.

This section alters the traditional capture doctrine in two ways: (1) the gift-in-default clause takes precedence over any implied alternative appointment to the powerholder or the powerholder's estate deduced from the use of a blending clause or otherwise; and (2) the ineffectively appointed property passes to the powerholder or the powerholder's estate only if there is no gift-in-default clause or to the extent the gift-in-default clause is ineffective. Nothing turns on whether the powerholder used a blending clause or somehow otherwise manifested an intent to assume control of the appointive property "for all purposes."

Subparagraph (2)(B) addresses the special case of a power of appointment that is general only because it is exercisable in favor of creditors, but not exercisable in favor of the powerholder or the powerholder's estate. This type of general power is sometimes used in generation-skipping transfer tax planning. However, this type of general power should not trigger the capture doctrine, because the powerholder and the powerholder's estate are impermissible appointees. Instead, ineffectively appointed property should pass under the gift-in-default clause (paragraph (1)) or, if there is no gift-in-default clause or it is ineffective, under a reversionary interest to the donor or the donor's transferee or successor in interest (subparagraph (2)(B)).

The rule of this section is essentially consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.21 and the accompanying Commentary.

NORTH CAROLINA COMMENT

This section is new to North Carolina law to the extent it provides that if a powerholder makes an ineffective power of appointment of a general power and there is no gift-in-default clause, the ineffective property passes to the powerholder if the powerholder is a permissible appointee or if the powerholder is deceased, to the estate of the powerholder if the estate is a permissible appointee. To the contrary, prior North Carolina case law has held that when a general power was not effectively exercised with no gift-in-default clause, the property passed to the distributees of the donor under the statute governing intestacy, there being no general residuary clause. See Holt v. Hogan , 58 N.C. 82, 5 Jones Eq. 82 (1859). The result in this case is consistent with prior North Carolina law regarding the disposition of appointed property upon the failure of a powerholder to exercise the power. See the North Carolina Comment to 31D-3-310 and the case cited.

OFFICIAL COMMENT

The rules of this section apply to unappointed property under a general power of appointment. The rules do not apply to unappointed property under a power of revocation, amendment, or withdrawal - powers pertaining to a trust. If the powerholder releases or dies without exercising a power of revocation or amendment, the power to revoke expires and, unless someone else continues to have a power of revocation or amendment, the trust becomes irrevocable and unamendable. If the powerholder releases or dies without exercising a power to withdraw principal of a trust, the principal that the powerholder could have withdrawn, but did not, remains part of the trust.

The rationale for the rules of this section runs as follows. The gift-in-default clause controls the disposition of unappointed property to the extent the clause is effective. To the extent the gift-in-default clause is nonexistent or ineffective, the disposition of the unappointed property depends on whether the powerholder merely failed to exercise the power or whether the powerholder released the power. If the powerholder merely failed to exercise the power, the unappointed property passes to the powerholder or to the powerholder's estate (if these are permissible appointees). The rationale is the same as when the powerholder makes an ineffective appointment. If, however, the powerholder released the power, the powerholder has affirmatively chosen to reject the opportunity to gain ownership of the property, hence the unappointed property passes under a reversionary interest to the donor or to the donor's transferee or successor in interest.

These rules are illustrated by the following examples.

Example 1 . D transfers property to T in trust, directing T to pay the income to S (D's son) for life, with a general testamentary power in S to appoint the principal of the trust, and in default of appointment the principal is to be distributed "to S's descendants who survive S, by representation, and if none, to X-Charity." S dies leaving a will that does not exercise the power. The principal passes under the gift-in-default clause to S's descendants who survive S, by representation.

Example 2 . Same facts as Example 1, except that D's gift-in-default clause covered only half of the principal, and S died intestate. Half of the principal passes under the gift-in-default clause. The other half of the principal passes to S's estate for distribution to S's intestate heirs.

Example 3 . Same facts as Example 2, except that S released the power before dying intestate. Half of the principal passes under the gift-in-default clause. The other half of the principal passes to D or to D's transferee or successor in interest.

In addition to governing a released general power, subparagraph (2)(B) also applies to the special case of an unexercised general power that is general only because it is exercisable in favor of creditors, but not exercisable in favor of the powerholder or the powerholder's estate. This type of general power is sometimes used in generation-skipping transfer tax planning. In such a case, unappointed property passes under the gift-in-default clause (paragraph (1)) or, if there is no gift-in-default clause or to the extent it is ineffective, under a reversionary interest to the donor or the donor's transferee or successor in interest (subparagraph (2)(B)).

The rules of this section are essentially consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.22 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters modified the provisions of this section to clarify it without intending to make any substantive changes.

Subsection (a) (subparagraph (2)(B) of the Uniform Powers of Appointment Act) is generally consistent with prior North Carolina law in providing that to the extent the powerholder releases a general power of appointment and there is no gift-in-default clause, the unappointed property passes under a reversionary interest to the donor or the donor's transferee or successor in interest. See Voncannon v. Hudson Belk Co. of Asheboro, N.C. , 236 N.C. 709, 73 S.E.2d 875 (1953) where the court held that where there was no gift-in-default clause and the powerholder released the general power by estoppel, the property vested in the donor's heirs at law.

Subsection (b) (subparagraph (2)(A) of the Uniform Powers of Appointment Act) is new to North Carolina law in providing that to the extent the powerholder fails to exercise a general power and there is no gift-in-default clause, the unappointed property passes to the powerholder if the powerholder is a permissible appointee, or, if deceased, to the powerholder's estate if the estate is a permissible appointee. This differs from prior North Carolina case law holding that upon failure to exercise a general power with no gift-in-default clause the property becomes vested in the heirs of the donor and not those of the donee. See, e.g., Chewning v. Eason , 158 N.C. 578, 74 S.E.2d 357 (1912).

OFFICIAL COMMENT

To the extent the powerholder of a nongeneral power releases, ineffectively exercises, or fails to exercise the power, thus causing the power to lapse, the gift-in-default clause controls the disposition of the unappointed property to the extent the gift-in-default clause is effective.

To the extent the gift-in-default clause is nonexistent or ineffective, the unappointed property passes to the permissible appointees of the power - including those who are substituted for permissible appointees under an antilapse statute (see Section 306) - if the permissible appointees are "defined and limited" (on the meaning of this term of art, see the Comment to Section 205) and the donor has not manifested an intent that the permissible appointees shall receive the appointive property only so far as the powerholder elects to appoint it to them. This rule of construction is based on the assumption that the donor intends the permissible appointees of the power to have the benefit of the property. The donor focused on transmitting the appointive property to the permissible appointees through an appointment, but if the powerholder fails to carry out this particular method of transfer, the donor's underlying intent to pass the appointive property to the defined and limited class of permissible appointees should be carried out. Subparagraph (2)(A) effectuates the donor's underlying intent by implying a gift in default of appointment to the defined and limited class of permissible appointees.

If the defined and limited class of permissible appointees is a multigenerational class, such as "descendants," "issue," "heirs," or "relatives," the default rule of construction is that they take by representation. See Restatement Third of Property: Wills and Other Donative Transfers § 14.3, Comment b. If the defined and limited class is a single-generation class, the default rule of construction is that the eligible class members take equally. See Restatement Third of Property: Wills and Other Donative Transfers § 14.2.

No implied gift in default of appointment to the permissible appointees arises if the permissible appointees are identified in such broad and inclusive terms that they are not defined and limited. In such an event, the donor has no underlying intent to pass the appointive property to such permissible appointees. Similarly, if the donor manifests an intent that the defined and limited class of permissible appointees is to receive the appointive property only by appointment, the donor's manifestation of intent eliminates any implied gift in default to the permissible appointees. Subparagraph (2)(B) responds to these possibilities by providing for a reversionary interest to the donor or the donor's transferee or successor in interest.

The rules are illustrated by the following examples.

Example 1 . D died, leaving a will devising property to T in trust. T is directed to pay the income to S (D's son) for life, and then to pay the principal "to such of S's descendants who survive S as S may appoint by will." D's will contains no gift-in-default clause. S dies without exercising the nongeneral power. The permissible appointees of the power constitute a defined and limited class. Accordingly, the principal of the trust passes at S's death to S's descendants who survive S, by representation.

Example 2 . Same facts as Example 1, except that the permissible appointees of S's power of appointment are "such one or more persons, other than S, S's estate, S's creditors, or creditors of S's estate." The permissible appointees do not constitute a defined and limited class. Accordingly, the principal of the trust passes, at S's death, under a reversionary interest to D or D's transferee or successor in interest.

The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.23 and the accompanying Commentary.

NORTH CAROLINA COMMENT

This subsection is somewhat consistent with prior North Carolina case law in providing that the unappointed property under a released or unexercised nongeneral power passes if there is no gift-in-default clause to the permissible appointees who are defined and limited and the terms of the instrument creating the power do not manifest a contrary intent. In the case of Henderson v. Western Carolina Power Co. , 200 N.C. 443, 157 S.E. 425 (1931), the court held that when the powerholder fails to make an appointment of a nongeneral power that is a "trust power" in which a fiduciary obligation rests upon the powerholder to make an appointment among a class of beneficiaries and there is no gift-in-default clause, the court of equity will apportion the property equally among all members of the class.

The rationale of this section and that of the Henderson decision is basically the same, that is, "the donor's underlying intent to pass the appointive property to the defined and limited class of permissible appointees should be carried out." See the Official Comment to this section. The difference is that in this section that intent is presumed and the section provides for the disposition of the property to the class of the permissible appointees by representation, whereas in the Henderson decision the court must find that the power is a "trust power" and, if so, apportion the property equally among the class of permissible appointees.

OFFICIAL COMMENT

If a powerholder makes a valid partial appointment to a taker in default, leaving some property unappointed, there is a question about whether that taker in default may also fully share in the unappointed property. In the first instance, the intent of the donor controls. In the absence of any indication of the donor's intent, it is assumed that the donor intends that the taker can take in both capacities. This rule presupposes that the donor contemplated that the taker in default who is an appointee could receive more of the appointive assets than a taker in default who is not an appointee. The donor can defeat this rule by manifesting a contrary intent in the instrument creating the power of appointment, thereby restricting the powerholder's freedom to benefit an appointee who is also a taker in default in both capacities. If the donor has not so manifested a contrary intent, the powerholder is free to exercise the power in favor of a taker in default who is a permissible appointee. Unless the powerholder manifests a contrary intent in the terms of the instrument exercising the power, it is assumed that the powerholder does not intend to affect in any way the disposition of any unappointed property.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.24 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters could find no prior North Carolina case law recognizing the rule of this section regarding the disposition of unappointed property if a partial appointment is made to a taker-in-default.

OFFICIAL COMMENT

This section articulates the rule that, to the extent an appointee would have taken appointed property as a taker in default, the appointee takes under the gift-in-default clause rather than under the appointment.

Takers in default have future interests that may be defeated by an exercise of the power of appointment. To whatever extent the powerholder purports to appoint an interest already held in default of appointment, the powerholder does not exercise the power to alter the donor's disposition but merely declares an intent not to alter it. To the extent, however, that the appointed property is different from (e.g., is a lesser estate) or exceeds the total of the property the appointee would receive as a taker in default, the property passes under the appointment.

Usually it makes no difference whether the appointee takes as appointee or as taker in default. The principal difference arises in jurisdictions that follow the rule that the estate creditors of the powerholder of a general testamentary power that was conferred on the powerholder by another have no claim on the appointive property unless the powerholder has exercised the power. Although this act does not follow that rule regarding creditors' rights (see Section 502), some jurisdictions do.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.25 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The rule of this section that if an appointment is made to a taker-in-default, the power is not deemed to be exercised and the appointee takes under the default clause is new to North Carolina law. As noted in the Official Comment, this rule is significant for purposes of North Carolina creditors' rights. Under this section, property appointed to a taker-in-default, which appointment is deemed not to be exercised, is not subject to the claims of creditors because under G.S. 31D-5-502, unlike the Uniform Powers of Appointment Act, appointive property subject to a general power of appointment created by a person other than the powerholder is subject to the creditor claims only when and to the extent the powerholder exercises this power .

OFFICIAL COMMENT

This section recognizes that a powerholder lacks the authority to revoke or amend an exercise of the power of appointment, except to the extent (1) the powerholder reserved a power of revocation or amendment in the instrument exercising the power of appointment and the terms of the instrument creating the power of appointment do not effectively prohibit the reservation, or (2) the donor provided that the exercise is revocable or amendable.

A powerholder who exercises a power of appointment is like any other transferor of property in regard to authority to revoke or amend the transfer. Hence, unless the powerholder (or the donor) in some appropriate manner manifests an intent that an appointment is revocable or amendable, the appointment is irrevocable.

The ability of an agent or guardian to revoke or amend the exercise of a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

Other law of the state may permit the reformation of an otherwise irrevocable instrument. See, for example, Uniform Probate Code § 2-805; Uniform Trust Code § 415.

The rule of this section is essentially consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 19.7 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters could find no prior North Carolina law recognizing the rule of this section that a powerholder may revoke or amend the exercise of a power of appointment only if the powerholder or the donor manifests an intent that an appointment is revocable or amendable. The drafters note that this rule is consistent with the North Carolina common law rule that a settlor may not revoke or amend a trust if the instrument does not provide for revocation or amendment, a rule that has been reversed by G.S 36C-6-602(a). See the North Carolina Comment to that section.

OFFICIAL COMMENT

A prospective powerholder cannot be compelled to accept the power of appointment, just as the prospective donee of a gift cannot be compelled to accept the gift.

A disclaimer is to be contrasted with a release. A release occurs after the powerholder accepts the power. A disclaimer prevents acquisition of the power, and consequently a powerholder who has accepted a power can no longer disclaim.

Disclaimer statutes frequently specify the time within which a disclaimer must be made. The Uniform Disclaimer of Property Interests Act (1999) (UDPIA) does not specify a time limit, but allows a disclaimer until a disclaimer is barred (see UDPIA § 13).

Disclaimer statutes customarily specify the methods for filing a disclaimer. UDPIA § 12 provides that the statutory methods must be followed. In the absence of such a requirement, statutory formalities for making a disclaimer of a power are not construed as exclusive, and any manifestation of the powerholder's intent not to accept the power may also suffice.

A partial disclaimer of a power of appointment leaves the powerholder possessed of the part of the power not disclaimed.

Just as an individual who would otherwise be a powerholder can avoid acquiring the power by disclaiming it, a person who otherwise would be a permissible appointee, appointee, or taker in default of appointment can avoid acquiring that status by disclaiming it.

The ability of an agent or guardian to disclaim on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 20.4 and the accompanying Commentary.

NORTH CAROLINA COMMENT

As provided by subdivision (1), under Chapter 31B a powerholder may disclaim a power of appointment although Chapter 31B uses the terminology for renunciation rather than disclaimer. See G.S. 31B-1(a). The power of appointment may be renounced even if the creator of the power imposed a spendthrift provision or a similar restriction or limitation on the right to renounce. Id .

Also as provided in subdivision (2), under Chapter 31B an appointee may renounce an interest in the appointed property, the appointee being among those to whom G.S. 31B-1(a) grants the right to renounce. See G.S. 31B-1(a)(8). A permissive appointee and a taker in default are granted the right to renounce by implication in G.S. 31B-2.1(j) providing to whom the permissive appointee and taker in default must deliver a copy of the renunciation.

G.S. 31B-1(a) qualifies the provisions of subdivisions (1) and (2) that a part of a power of appointment or an interest in the appointed property may be disclaimed by providing that there can be no right of partial renunciation if the instrument creating the interest expressly so provides.

The following is a summary of how some of the more significant provisions of Chapter 31B as it exists on the date of this comment relate to renunciation of a power of appointment or interest therein. It is essential, however, that practitioners consult the statutes themselves and not rely entirely on the summary.

The Instrument of Renunciation. Under G.S. 31B-1(c), an instrument of renunciation shall (i) identify the creator of the holder of the power, (ii) describe the property interest renounced, (iii) declare the renunciation to the extent thereof, and (iv) be signed or acknowledged by the person renouncing.

Filing Requirements. There is no requirement under Chapter 31B that the renunciation of a power be filed within any certain period of time to be effective, but under G.S. 31B-2(a) in order to be a qualified disclaimer for federal estate and gift tax purposes, the instrument of renunciation must be filed within the time period required under the federal statute for a renunciation to be effective as a qualified disclaimer.

Under G.S. 31B-2(c) the renunciation is effective when filed by the clerk of superior court of the county provided in that subsection. In addition, if an interest in any real property is being renounced, the instrument must be registered as provided in subsection (d).

However, failure to file or register the instrument of renunciation does not affect the effectiveness of renunciation as between the person whose property or interest therein is being renounced, and the person to whom property passes by reason of the renunciation, but record title to an instrument in real property does not pass to the person receiving the renounced interest until the instrument is registered. See G.S. 31B-2(d) and (e).

Delivery of the Instrument of Renunciation. Under G.S. 31B-2.1(j), (k) and (l), in the case of renunciation by the powerholder, appointee, permissible appointee or taker in default, a copy of the instrument of renunciation must be delivered to (i) the fiduciary acting under the instrument that created the power, or, if no fiduciary is serving, filed as an estate matter with the clerk of court having the power to appoint a fiduciary, and (ii) any holder of legal title to the property subject to the power of appointment other than a fiduciary. In case of a renunciation by an appointee, permissible appointee or taker in default, a copy of the instrument of renunciation must also be delivered to the powerholder, or in the case of an appointee of an exercised power if the powerholder is deceased, to the personal representative of the powerholder's estate.

The failure to deliver a copy of the renunciation as required by G.S. 31B-2.1 does not affect the validity of renunciation for purposes of G.S. 31B-3, even though the renunciation may not be recognized as one for federal gift and estate tax purposes.

Effect of Renunciation. G.S. 31B-3(a) contains provisions for the devolution of the interest renounced unless the decedent, donee of a power of appointment or creator of an interest under an inter-vivos trust provided otherwise. For example, if the renunciation is filed within time period described in G.S. 31B-1(a), the property interest renounced devolves as if the renouncing person had predeceased the date the transfer was complete for federal transfer tax purposes. See G.S. 31B-3(a)(1). If the renunciation is not filed within the time prescribed, the property interest devolves as if the person renouncing had died on the date the renunciation is filed. See G.S. 31B-3(a)(2).

Under G.S. 31B-3(f), except as provided in the instrument of renunciation, if the renounced property passes to a trust in which the person renouncing holds a power of appointment, the person renouncing is deemed to have renounced the power of appointment with respect to the renounced property passing into the trust if the person renouncing has a right to renounce the power. This provision would prevent a disclaimer by a surviving spouse of assets passing to a trust in which he or she had a power of appointment from being disqualified for purposes of federal gift and estate taxes by reason of the power.

Authority of Agent, Guardian and Parent to Renounce. The authority of an agent under a power of attorney to renounce an interest is addressed in G.S. 31B-1(a)(9e) and that of a guardian in G.S. 31B-1(a)(9d) except that a guardian must receive the prior or subsequent approval of the clerk of court, or, if required, of a resident judge of superior court. Under G.S. 31B-1(d) a parent may renounce on behalf of a minor if no guardian has been appointed.

OFFICIAL COMMENT

Whether a power of appointment is general or nongeneral, presently exercisable or testamentary, the powerholder has the authority to release the power in whole or in part, in the absence of an effective restriction on release imposed by the donor. A partial release is a release that narrows the freedom of choice otherwise available to the powerholder but does not eliminate the power. A partial release may relate either to the manner of exercising the power or to the persons in whose favor the power may be exercised.

If the powerholder did not create the power, so that the powerholder and donor are different individuals, the donor can effectively impose a restraint on release, but the donor must manifest an intent in the terms of the creating instrument to impose such a restraint.

If the powerholder created the power, so that the powerholder is also the donor, the donor/powerholder cannot effectively impose a restraint on release. A self-imposed restraint on release resembles a self-imposed restraint on alienation, which is ineffective. See, for example, Restatement Third of Trusts § 58.

If the exercise of a power of appointment requires the action of two or more individuals, each powerholder has a power of appointment. If one but not the other joint powerholder releases the power, the power survives in the hands of the nonreleasing powerholder, unless the continuation of the power is inconsistent with the donor's purpose in creating the joint power. See Restatement Third of Property: Wills and Other Donative Transfers § 20.1, Comment f.

The ability of an agent or guardian to release a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 20.1 and 20.2 and the accompanying Commentary.

NORTH CAROLINA COMMENT

This section has no prior statutory equivalent in North Carolina although the authority of a powerholder to release a power of appointment in general is recognized by North Carolina case law. See, e.g. Voncannon v. Hudson Belk Co. of Asheboro, N.C. , 236 N.C. 709, 712-13, 73 S.E.2d 875, 878 (1953) where the court said, quoting from 72 C.J.S. Powers § 19, 411, that "when a power is one in which the donee may exercise for his own benefit, it may be extinguished by his act. Even a special power…may be surrendered, renounced, or released or thereby extinguished."

OFFICIAL COMMENT

A powerholder may release the power of appointment by substantial compliance with the method specified in the terms of the instrument creating the power or any other method manifesting clear and convincing evidence of the powerholder's intent. Only if the method specified in the terms of the creating instrument is made exclusive is use of the other methods prohibited. Even then, a failure to comply with a technical requirement, such as required notarization, may be excused as long as compliance with the method specified in the terms of the creating instrument is otherwise substantial.

Examples of methods manifesting clear and convincing evidence of the powerholder's intent to release include: (1) delivering (by the same method of delivery that would make an instrument of transfer effective, see Restatement Third of Property: Wills and Other Donative Transfers § 20.3, Comment b) an instrument declaring the extent to which the power is released to an individual 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 appointive property, in which case the power is released to the extent a subsequent exercise of the power would defeat the interest transferred; (3) contracting with an individual 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 a subsequent exercise of the power would violate the terms of the contract; and (4) communicating in a record an intent to release the power, in which case the power is released to the extent a subsequent exercise of the power would be contrary to manifested intent.

The black-letter of this section is based on Uniform Trust Code § 602(c). The rule of this section is fundamentally consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 20.3 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The rule of subdivisions (1) and (2) that a powerholder may release a power of appointment by substantial compliance with the method provided in the terms of the instrument creating the power, which may be made exclusive, is new to North Carolina law although as noted in the Official Comment to this section, it is based upon, and has a counterpart in, the rule with respect to the revocation and amendment of a revocable trust provided in G.S. 36C-6-602(c).

Subdivision (2), providing that if the terms of the instrument creating the power do not provide a method of release or the method is not made exclusive, the power may be released by an instrument manifesting the powerholder's intent by "clear and convincing evidence", is generally consistent with North Carolina statutory and case law which recognizes three (3) specific examples of non-exclusive methods of release. These methods, outlined below, are substantially similar to the three (3) examples described in the Official Comment to the section which the Official Comment states manifest "clear and convincing evidence" of the powerholder's intent.

Non-exclusive Methods of Release. G.S. 39-33 [repealed] provides a method, substantially the same as example (1) in the Official Comment, that a power of appointment may be released by the execution by the powerholder of an instrument stating that the power is released to the extent set forth thereby, and the delivery of the instrument to any person who may be adversely affected if the power were exercised. This method of release is not exclusive and the failure to meet its requirements does not invalidate any other act of release. G.S. 39-34 [repealed].

Our courts have recognized a second method, similar to example (2) in the Comment, that a power of appointment may be released by the powerholder joining with some or all of the takers in default in a conveyance of the appointive interest. See, e.g., Weston v. Hasty, 264 N.C. 432, 436, 142 S.E.2d 23, 27 (1965); Voncannon v. Hudson Belk Co. of Asheboro, N.C. , 236 N.C. 709, 73 S.E.2d 875 (1953).

Our courts have also recognized a third method, similar to example (3) of the Official Comment, that a release may be effected by the donee contracting not to exercise the power with some other person who would be adversely affected by an exercise of the power. See Weston v. Hasty supra .

Validity as to Creditors. Under G.S. 39-35 [recodified as G.S. 31D-5-505] no release of a power of appointment which is made by the owner of legal title to real property is valid against creditors or purchasers for valuable consideration until the instrument setting forth the release is executed and acknowledged in a manner required for a deed and recorded in the county where the real property is located.

Notice to Fiduciaries. Under G.S. 39-36 [recodified as G.S. 31D-4-403.1] no fiduciary having possession or control of the property over which a power of appointment is exercisable shall be bound or affected by any release of such power without actual notice of the release.

CASE NOTES

Cited in Sprouse v. North River Ins. Co., 81 N.C. App. 311, 344 S.E.2d 555, cert. denied, 318 N.C. 284, 348 S.E.2d 344 (1986).

OFFICIAL COMMENT

A release is typically irrevocable. If a powerholder wishes to retain the power to revoke or amend the release, the powerholder should so indicate in the instrument executing the release.

The ability of an agent or guardian to revoke or amend the release of a power of appointment on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

Other law of the state may permit the reformation of an otherwise irrevocable instrument. See, for example, Uniform Probate Code § 2-805; Uniform Trust Code § 415.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers §§ 20.1 and 20.2 and the accompanying Commentary.

NORTH CAROLINA COMMENT

This section has no equivalent in prior North Carolina law.

OFFICIAL COMMENT

A powerholder of a presently exercisable power may contract to make, or not to make, an appointment if the contract does not confer a benefit on an impermissible appointee. The rationale is that the power is presently exercisable, so the powerholder can presently enter into a contract concerning the appointment.

The contract may not confer a benefit on an impermissible appointee. Recall that a general power presently exercisable in favor of the powerholder or the powerholder's estate has no impermissible appointees. See Section 305(a). In contrast, a presently exercisable nongeneral power, or a general power presently exercisable only in favor of one or more of the creditors of the powerholder or the powerholder's estate, does have impermissible appointees. See Section 305(b)-(c).

A contract not to appoint assures that the appointive property will pass to the taker in default. A contract to appoint to a taker in default, if enforceable, has the same effect as a contract not to appoint.

The ability of an agent or guardian to contract on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 21.1 and the accompanying Commentary.

NORTH CAROLINA COMMENT

Subdivision (1) providing that a powerholder of a presently exercisable power of appointment may contract not to exercise a power has been recognized by our courts, although it has been described as a method of release of a power of appointment. See Weston v. Hasty , 264 N.C. 432, 436, 142 S.E.2d 23, 27 (1965) and the North Carolina Comment to G.S. 31D-4-403.

The rule in subdivision (2) that a powerholder of a presently exercisable power of appointment may contract to exercise a power if the contract does not confer a benefit on an impermissible appointee has not been specifically recognized in prior North Carolina law.

OFFICIAL COMMENT

Except in the case of a power reserved by the donor in a revocable inter vivos trust, a contract to exercise, or not to exercise, a power of appointment that is not presently exercisable is unenforceable, because the powerholder does not have the authority to make a current appointment. If the powerholder was also the donor of the power and created the power in a revocable inter vivos trust, however, a contract to appoint is enforceable, because the donor-powerholder could have revoked the trust and recaptured ownership of the trust assets or could have amended the trust to change the power onto one that is presently exercisable.

In all other cases, the donor of a power not presently exercisable has manifested an intent that the selection of the appointees and the determination of the interests they are to receive are to be made in the light of the circumstances that exist on the date that the power becomes exercisable. Were a contract to be enforceable, the donor's intent would be defeated.

The ability of an agent or guardian to contract on behalf of a principal or ward is determined by other law, such as the Uniform Power of Attorney Act or the Uniform Guardianship and Protective Proceedings Act.

The rule of this section is consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 21.2 and the accompanying Commentary.

NORTH CAROLINA COMMENT

This section has no equivalent in prior North Carolina law with respect to the right of a powerholder of a power of appointment that is not presently exercisable to contract to exercise or not exercise the power only if the powerholder is a donee of the power or has reserved the power in a revocable trust.

OFFICIAL COMMENT

This section sets forth a rule on remedy. The remedy for a powerholder's breach of an enforceable contract to appoint, or not to appoint, is limited to damages payable out of the appointive property or, if appropriate, specific performance. The powerholder's owned assets are not available to satisfy a judgment for damages. For elaboration and discussion, see Restatement Third of Property: Wills and Other Donative Transfers §§ 21.1 and 21.2, and especially id., § 21.1, Comments c and d. This section does not address the amount of damages, which is determined by other law of the state, such as contract law.

NORTH CAROLINA COMMENT

The rule of this section that the remedy for a powerholder's breach of their contract to appoint or not to appoint appointed property limited to damages payable out of the appointed property or, if appropriate, specific performance, is new to North Carolina law.

OFFICIAL COMMENT

Subsection (b) states a well-settled rule: a donor of a power of appointment cannot use a fraudulent transfer to avoid creditors. If a donor fraudulently transfers appointive property, retaining a power of appointment, the donor/powerholder's creditors and the creditors of the donor/powerholder's estate may reach the appointive property as provided in the law of fraudulent transfers.

Subsection (c) also states a well-settled rule: if there is no fraudulent transfer, and the donor/powerholder has made an irrevocable appointment to a third party of the appointive property, the appointed property is beyond the reach of the donor/powerholder's creditors or the creditors of the donor/powerholder's estate. In other words, an irrevocable and nonfraudulent exercise of the general power by the donor/powerholder in favor of someone other than the powerholder or the powerholder's estate eliminates the ability of the powerholder's creditors or the creditors of the powerholder's estate to reach those assets.

Subsection (d) establishes rules governing the remaining fact-pattern: the donor has retained a general power of appointment but has made neither a fraudulent transfer nor an irrevocable appointment. In such a case, the following rules apply. If the donor retains a presently exercisable general power of appointment, the appointive property is subject to a claim of - and is reachable by - a creditor of the powerholder to the same extent as if the powerholder owned the appointive property. If the donor retains a general power of appointment exercisable at death, the appointive property is subject to a claim of - and is reachable by - a creditor of the donor/powerholder's estate (defined with reference to other law, but including costs of administration, expenses of the funeral and disposal of remains, and statutory allowances to the surviving spouse and children) to the extent the estate is insufficient, subject to the decedent's right to direct the source from which liabilities are paid. For the same rules in the context of a retained power to revoke a revocable trust, see Uniform Trust Code § 505(a). The application of these rules is not affected by the presence of a spendthrift provision or by whether the claim arose before or after the creation of the power of appointment. See Restatement Third of Property: Wills and Other Donative Transfers § 22.2, Comment a.

Subsection (a) enables all of these rules to apply even if the general power was not created in a transfer made by the powerholder. The rules will apply to the extent the powerholder contributed value to the transfer. See Restatement Third of Property: Wills and Other Donative Transfers § 22.2, Comment d. Consider the following examples, drawn from the Restatement.

Example 1 . D purchases Blackacre from A. Pursuant to D's request, A transfers Blackacre "to D for life, then to such person as D may by will appoint." The rule of subsection (d) applies to D's general testamentary power, though in form A created the power.

Example 2 . A by will transfers Blackacre "to D for life, then to such persons as D may by will appoint." Blackacre is subject to mortgage indebtedness in favor of X in the amount of $10,000. The value of Blackacre is $20,000. D pays the mortgage indebtedness. The rule of subsection (d) applies to half of the value of Blackacre, though in form A's will creates the general power in D.

Example 3 . D, an heir of A, contests A's will on the ground of undue influence on A by the principal beneficiary under A's will. The contest is settled by transferring part of A's estate to Trustee in trust. Under the trust, Trustee is directed "to pay the net income to D for life and, on D's death, the principal to such persons as D shall by will appoint." The rule of subsection (d) applies to the transfer in trust, though in form D did not create the general power.

The provisions of this section are designed to be consistent with Uniform Trust Code § 505(a). The provisions and this Comment also rely in part on Restatement Third of Property: Wills and Other Donative Transfers § 22.2 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters have found no prior North Carolina law recognizing the "well-settled" rule of subsection (b) that a donor of a power of appointment cannot use a fraudulent transfer of appointive property to avoid creditors.

Nor have the drafters found any prior North Carolina law recognizing the "well-settled" rule of subsection (c) that if the powerholder who is the donor makes an irrevocable and nonfraudulent appointment to a third party, the appointive property is beyond the reach of the powerholder's creditors or the creditors of the powerholder's estate.

Subsection (d) has not been addressed by prior North Carolina law, but, as noted in the Official Comment to this section, it has a counterpart in G.S. 36C-5-501(a) providing rules for subjecting the property of a revocable trust to the claims of creditors.

OFFICIAL COMMENT

Subsection (a) states the general rule of this section. Appointive property subject to a nongeneral power of appointment is exempt from a claim of a creditor of the powerholder or the powerholder's estate. The rationale for this general rule is that a nongeneral power of appointment is not an ownership-equivalent power, so the powerholder's creditors have no claim to the appointive assets.

Subsection (b) addresses an important exception: the fraudulent transfer. A fraudulent transfer arises if the powerholder formerly owned the appointive property covered by the nongeneral power and transferred the property in fraud of creditors, reserving the nongeneral power. In such a case, the creditors can reach the appointive property under the rules relating to fraudulent transfers.

Subsection (c) also addresses an important exception, arising when the initial gift in default of appointment is to the powerholder or the powerholder's estate. In such a case, the power of appointment, though in form a nongeneral power, is in substance a general power, and the rights of the powerholder's creditors in the appointive property are governed by Sections 501 and 502.

The rules of this section are consistent with, and this Comment draws on, Restatement Third of Property: Wills and Other Donative Transfers § 22.1 and the accompanying Commentary.

NORTH CAROLINA COMMENT

The drafters could find no statutory or case law addressing the rules of this section.

OFFICIAL COMMENT

This act is intended to have the widest possible effect within constitutional limitations. Specifically, the act applies to all powers of appointment whenever created, to judicial proceedings concerning powers of appointment commenced on or after its effective date, and unless the court otherwise orders, to judicial proceedings in progress on the effective date. In addition, any rules of construction or presumption provided in the act apply to preexisting instruments unless there is a clear indication of a contrary intent in the instruments's terms. By applying the act to preexisting instruments, the need to know two bodies of law will quickly lessen.

This legislation cannot be fully retroactive, however. Constitutional limitations preclude retroactive application of rules of construction to alter property rights that became irrevocable prior to the effective date. Also, rights already barred under former law are not revived by a possibly more liberal rule under this act. Nor, except as otherwise provided in paragraphs (1) through (4) of subsection (a), is an action done before the effective date of the act affected by the act's enactment.

For comparable Uniform Law provisions, see Uniform Trust Code § 1106 and Uniform Probate Code § 8-101.

NORTH CAROLINA COMMENT

The drafters modified the provisions of subdivision (a)(4) of this section of the Uniform Powers of Appointment Act relating to its application to instruments executed before the effective date by adding to the end of the first sentence the subdivision the phrase "or unless application of that rule of the construction or presumption would impair substantial rights of a party created under North Carolina law in effect prior to the effective date of this Chapter, in which case the rule of construction or presumption does not apply and the superseded rule of construction or presumption applies." Although this Chapter is intended to have broad application, the drafters concluded that the rule of construction or presumption provided in this Chapter should not be applied to an instrument executed before the effective date of this Chapter if the application of such a rule or presumption would impair the substantial rights of a party. This language is consistent with the provisions of G.S. 36C-11-1106(b) of the Uniform Trust Code.