Colo. Rev. Stat. § 15-2.5-308
If a powerholder exercises a power of appointment in a disposition that also disposes of property the powerholder owns, the owned property and the appointive property must be allocated in the permissible manner that best carries out the powerholder's intent.
C.R.S. § 15-2.5-308
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 property and the 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.