IRS Determines Value of Trust Property Isn’t Included in Gross Estate

IRS Determines Value of Trust Property Isn’t Included in Gross Estate

Testamentary power of appointment over principal and accrued/undistributed trust income isn’t a general power of appointment

Private Letter Ruling 201229005 (July 20, 2012) found in favor of a taxpayer who was a beneficiary (along with his sister) of an irrevocable trust established by his settlor-parents.  Under the terms of the trust, a special trustee had the discretion to distribute principal and income to the taxpayer-son, his spouse, his issue and his issue’s spouses.  On the son’s death, the trustee was to distribute principal and income to the “settlors’ issue” according to the son’s written terms and conditions delivered to the trustee while the son was alive.

 

The son requested a ruling by the Internal Revenue Service that the testamentary power of appointment (POA) didn’t constitute a general POA within the meaning of Internal Revenue Code Section 2041(b)(1) and therefore, the existence, exercise, failure to exercise or release of the son’s power to appoint principal and income wouldn’t cause the value of the trust property to be included in his gross estate.

 

What Constitutes a General POA?

IRC Section 2041(b)(1) provides that a general POA means a power that’s exercisable in favor of a decedent, his estate, his creditors or the creditors of his estate.  It’s not a general POA if it’s exercisable in favor of one or more designated persons other than a decedent, his creditors, his estate or the creditors of his estate.  In this case, the son’s POA was testamentary, so he couldn’t appoint any part of the trust to himself or his creditors during his life.  And, the son had the power to distribute principal and income to the settlors’ issue—a class of appointees that doesn’t include the son’s estate or the creditors of his estate.  The IRS, therefore, found that the power wasn’t a general POA under Section 2041(b)(1).

 

No Estate Inclusion

Under IRC Section 2041(a)(2), the value of a gross estate includes the value of property over which a decedent has a general POA at the time of his death. The IRS, however, found that there wasn’t a general POA and as such, the existence, exercise, failure to exercise or release of the son’s power to appoint principal and income wouldn’t cause the value of the trust property to be included in his gross estate.

 

 

 

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