In private letter rulings 201231007 and 201229005, the Service found that powers of appointment were not general powers of appointment, even though they did not have the language from the regulations prohibiting exercise in favor of the power holders, the power holders’ estate, the power holders’ creditors, or the creditors of the power holders’ estates. The power holders in the rulings were siblings, each holding a testamentary power to appoint trust principal and income to a class of descendants of their parents, which arguably included themselves.
The issue in each of the rulings is whether or not the power was taxable as a general power of appointment because it was exercisable in favor of any one of, or more of, the power-holder, power-holder’s estate or the creditors of either the power-holder or the power-holder’s estate. The government decided it was not, even though the power-holder was the trust settlor’s child.
The private letter rulings concluded that their respective powers were not taxable general powers of appointment. The Service came to this conclusion because they were testamentary powers and the power holders could not appoint to themselves or their creditors while they were alive, and the class of allowable appointees did not include the power holders’ estates or the power holders’ creditors after the power holders’ respective deaths. This surprise decision was a favorable outcome for the taxpayer.
While the taxpayers in these rulings were able to avoid taxation, as a planning matter, it is always better to include the language from the regulations and prohibit exercise in favor of the power holder, the power holder’s estate, the power holder’s creditors, or the creditors of the power holder’s estate. That way, it is clearly not a general power of appointment. Powers of appointment can provide great flexibility to estate planning. However, when you do not want estate tax inclusion that comes with a general power of appointment, it is best to be clear and include the limiting language from the regulations.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com
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