Legal Definitions - discretionary power of appointment

A discretionary power of appointment is a legal authority given to a specific person, known as the "powerholder" or "donee," allowing them to decide whether, and to whom, certain assets will be distributed from a pre-defined group of potential recipients. The key characteristic is that the powerholder has the option to exercise this power; they are not legally obligated to distribute the assets.

Here are the core aspects of a discretionary power of appointment:

• Optional Exercise: The powerholder has the choice to distribute the assets or to refrain from doing so. They are not compelled to act.
• Defined Beneficiary Group: The original grantor (the person who created the power) specifies a clear class of individuals or entities (e.g., "my children," "graduates of a specific university," "charitable organizations focused on health") from which the powerholder must choose if they decide to distribute.
• Adherence to Grantor's Intent: If the powerholder chooses to exercise the power, their decisions must be made thoughtfully and in alignment with the original grantor's stated purpose or wishes.
• Default Beneficiaries: The original grantor typically specifies who will receive the assets if the powerholder chooses not to exercise the power, or if the powerholder passes away without exercising it. This ensures the assets have a destination even if the discretion is not used.

Here are some examples to illustrate this concept:

• Example 1: Family Trust for Education

  A wealthy grandparent establishes a trust for their descendants, naming their eldest child, Sarah, as the powerholder. The trust document states: "Sarah may, at her sole discretion, distribute up to $100,000 from this trust to any of my grandchildren who pursue a graduate degree, to help cover their tuition and living expenses." The trust further specifies that if Sarah does not distribute these funds by the time the youngest grandchild turns 30, the remaining $100,000 will be donated to a specific university's scholarship fund.

  • How it illustrates the term: Sarah has the discretionary power to decide whether to give money to her nieces and nephews for graduate school. She is not required to do so. The "objects of the power" are clearly defined as "any of my grandchildren who pursue a graduate degree." If she chooses to act, she must do so for their education expenses, aligning with the grandparent's intent. If she chooses not to exercise this power, the funds go to the university scholarship fund, which serves as the default beneficiary.

• Example 2: Business Succession Planning

  The founder of a successful tech startup, David, creates a will that includes a provision for his company shares. He appoints his long-time business partner, Emily, as the powerholder. The will states: "Emily has the discretion to appoint up to 15% of my company shares to any of my employees who have been with the company for at least five years and have demonstrated exceptional leadership potential, to ensure the company's continued success." If Emily does not appoint these shares within two years of David's passing, they are to be sold, and the proceeds distributed equally among David's children.

  • How it illustrates the term: Emily holds a discretionary power because she can choose whether or not to transfer the shares to eligible employees. She is not mandated to do so. The "objects of the power" are specific: "employees who have been with the company for at least five years and have demonstrated exceptional leadership potential." Her decision, if made, must align with the goal of ensuring the company's success. If she opts not to exercise this power, the shares are sold, and the proceeds go to David's children as the default beneficiaries.

• Example 3: Charitable Foundation Grantmaking

  A philanthropic individual establishes a private foundation with a substantial endowment. The foundation's charter grants the board of directors (as powerholders) "discretionary power to award grants to non-profit organizations dedicated to promoting arts and culture within the city." The charter also stipulates that if the board fails to award any grants for three consecutive years, a portion of the endowment will automatically be transferred to the city's public library system.

  • How it illustrates the term: The board of directors possesses discretionary power because they have the option to award grants; they are not required to award a specific number or amount annually. The "objects of the power" are clearly defined as "non-profit organizations dedicated to promoting arts and culture within the city." If they choose to award grants, their decisions must align with this purpose. If they choose not to exercise this power for three consecutive years, the city's public library system becomes the default beneficiary, receiving a portion of the endowment.