Colorado Code
Part 3 - Exercise of Power of Appointment
§ 15-2.5-310. Disposition of Unappointed Property Under Released or Unexercised General Power

Source: L. 2014: Entire article added, (HB 14-1353), ch. 209, p. 778, § 1, effective July 1, 2015.
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or dies without exercising a power to withdraw principal of a trust, the principal that the powerholder could have withdrawn, but did not, remains part of the trust.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, subsection (1)(b)(II) 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 (subsection (1)(a)) 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 (subsection (1)(b)(II)).
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.