Taxation of Estates and Gifts

A power of appointment is a right to order the transfer of property owned by someone else.

A donor gives power to a donee who can exercise the power to appoint the appointive property to the permissive appointees. When he does so, the person given the property is the appointee.

A donee can release a power by a writing evidencing such intention.

A donee can also disclaim a power (usually must be within 9 months) to be treated as if he never had the power of appointment.

Power of appointment can be contingent or not, joint or not, and limited in time or not (in which case, the power lapses).

If the decedent is a donee of general powers of appointment, the appointive property is included in his estate tax. 26 U.S.C. § 2041(a)(2).

General Power of Appointment

A general power of appointment is one that has one of the following as permissive appointees:

1. The decedent
2. The decedent's estate
3. The decedent's creditors
4. The decedent's estate's creditors

Except the following are not general powers of appointment:

1. A power to consume, invade, or appropriate property for the benefit of the decedent that is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent. 26 U.S.C. § 2041(b)(1)(A).
2. A power exercisable by the decedent only in conjunction with the creator of the power. 26 U.S.C. § 2041(b)(1)(C)(i).
   • Except on the flip side, it is then includable in the creator's estate tax if he predeceases under 26 U.S.C. § 2038. (And § 2036 could also apply.)
3. A power exercisable by the decedent only in conjunction with a person having a substantial interest in the property subject to the power, which is adverse to the exercise of the power in favor of the decedent. 26 U.S.C. § 2041(b)(1)(C)(ii).

Substantial Adverse Interest

A substantial adverse interest is one where one has a not insignificant proportion of the power "after the decedent's death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate." 26 CFR § 20.2041-3(c)(2).

If one's interest does not pass on death to his fellow joint donees, they do not have substantial adverse interests. 26 CFR § 20.2041-3(c)(3).

Aliquot Rule

If decedent has a joint general power of appointment with another person for whom it is also a general power of appointment, the estate tax inclusion is the aliquot share—the amount divided by how many people have a general power of appointment. 500-Rev. Rule 76-503.

Like with § 2038, it does matter whether the power is subject to a contingency beyond the decedent's control. § 2041 is only triggered when the decedent has the power at the time of his death. If it was subject to a condition not satisfied, nothing is included.

Property required to be included in the decedent's gross estate because of the power of appointment is also included in the estate's income tax. 26 U.S.C. § 1014(b)(9).

If the decedent exercises or releases property, treat it as if he transferred the property instead. 26 U.S.C. § 2514(b).

• Thus, check §§ 2035–2038 to see if transferring the property would make it includable under 26 U.S.C. § 2041(a)(2). (26 U.S.C. § 2035 is the most likely, especially if nothing is retained.)

Aliquot Rule

If decedent has a joint general power of appointment with another person for whom it is also a general power of appointment, the estate tax inclusion is the aliquot share—the amount divided by how many people have a general power of appointment. 500-Rev. Rule 76-503.

If a power of appointment requires the consent of another, it goes away when that other person dies first. It cannot be exercised because he is already dead.