Legal Definitions - power of appointment

A power of appointment is a legal mechanism that allows one person (known as the "donor") to grant another person (the "donee") the authority to decide who will ultimately receive certain property or assets. Instead of the donor directly naming the final recipients in their will or trust, they empower the donee to make that decision at a later time.

This power is typically established within a will or a trust document and gives the donee the ability to "appoint" or designate the beneficiaries of specific assets. There are two main types:

• General Power of Appointment: This grants the donee complete freedom to choose anyone as a beneficiary, including themselves, their creditors, or their own estate. There are no restrictions on who can receive the property.
• Special Power of Appointment: This limits the donee's choices to a specific group of individuals or organizations defined by the donor. For example, the donor might specify that the property can only go to "my children," "my nieces and nephews," or "registered charities focused on medical research."

If the donee chooses not to exercise their power of appointment, or if they fail to do so correctly, the property will typically be distributed to alternative beneficiaries previously named by the donor, often referred to as "takers in default."

Examples:

• Example 1 (General Power): Eleanor creates a living trust that holds most of her assets. The trust document states that upon her death, the remaining assets will be held for her husband, Robert, for his lifetime. It further specifies that upon Robert's death, the remaining trust principal will be distributed "to such persons or entities as Robert shall appoint by his last will and testament."

  Explanation: Eleanor (the donor) has given Robert (the donee) a general power of appointment. Robert has the complete freedom to decide who will receive the trust assets after his death. He could choose to leave them to their children, a new spouse if he remarries, a charity, or even his own estate, without any limitations from Eleanor.

• Example 2 (Special Power - Specific Family Group): Mark's will establishes a fund of $500,000 to be distributed "among my grandchildren as my daughter, Sarah, shall determine in her sole discretion." Mark has five grandchildren, but Sarah knows that one grandchild has significant special needs that will require lifelong financial support, while others are already financially secure.

  Explanation: Mark (the donor) has granted Sarah (the donee) a special power of appointment. Sarah can decide how to divide the $500,000 among Mark's grandchildren, potentially giving a larger share to the grandchild with special needs. However, she cannot appoint the money to anyone outside the defined group of "my grandchildren," such as her own children who are not Mark's grandchildren, or a charity.

• Example 3 (Special Power - Specific Charitable Purpose): In her will, Clara designates a portion of her estate, $250,000, to be given "to one or more non-profit organizations dedicated to wildlife conservation, as my executor, David, shall select." Clara was passionate about animals but didn't want to name a specific charity in her will, fearing it might not exist or be effective in the future.

  Explanation: Clara (the donor) has given David (the donee) a special power of appointment. David has the authority to choose which specific wildlife conservation charities will receive the funds. However, his choice is restricted to organizations that fit the "wildlife conservation" criteria; he cannot, for instance, donate the money to a hospital or an art museum.