Legal Definitions - Reserved Power of Appointment

A Reserved Power of Appointment occurs when an individual transfers ownership of assets to another person or entity (such as a trust), but explicitly keeps for themselves the authority to decide who will ultimately receive or benefit from those assets in the future. Essentially, the original owner gives away the property but "reserves" the right to "appoint" (name) the final recipients or beneficiaries.

Here are some examples to illustrate this concept:

• Example 1: Family Trust Distribution

  An elderly woman, Eleanor, places a significant sum of money into an irrevocable trust for the benefit of her future descendants. However, the trust document includes a provision stating that Eleanor retains the right to specify, at a later date (perhaps in her will or a separate written instrument), how the trust's principal will be distributed among her grandchildren when they reach a certain age, or even to appoint a portion to a specific charity if her grandchildren are well-provided for.

  This illustrates a Reserved Power of Appointment because Eleanor has given away the assets (to the trust), but she has "reserved" the "power of appointment" to herself, meaning she still controls who ultimately receives the benefit from those assets, even though she no longer directly owns them.

• Example 2: Real Estate Transfer with Future Control

  A father, Robert, deeds his vacation home to his daughter, Sarah, but the deed includes a clause stating that Robert reserves the right to designate, through his will, who will inherit the vacation home after Sarah's death. This allows Robert to ensure the property stays in the family in a specific way, even if Sarah's own estate plan might otherwise direct it differently.

  Here, Robert transferred ownership of the home to Sarah, but he kept (reserved) the authority (power of appointment) to decide its ultimate disposition after Sarah's lifetime, rather than letting Sarah's own estate plan fully dictate it.

• Example 3: Business Shares for Future Employees

  A founder, David, transfers a block of shares in his private company to a holding company he controls, intending for these shares to eventually benefit key employees. However, the transfer agreement specifies that David retains the exclusive right to name the specific employees and the exact number of shares each will receive at a future date, based on their performance and loyalty.

  David has given away the shares to the holding company, but he has "reserved" the "power of appointment" to himself, allowing him to decide precisely which employees will ultimately receive those shares and in what proportions, rather than the holding company making that decision independently.