Testamentary Power of Appointment

Testamentary Power of Appointment

Does it rise to the level of a general POA and become includible in a gross estate?

In Private Letter Ruling 201444003 (released Oct. 31, 2014), the Internal Revenue Service determined that a testamentary power of appointment (POA) didn’t constitute a general POA under Internal Revenue Code Section 2041.  The IRS further determined that the existence or exercise of a grandchild’s POA to appoint trust principal and accumulated or undistributed income wouldn’t cause the value of the trust property to be included in the grandchild’s estate under Section 2041(a).

 

The Grandchild’s POA

A settlor’s will provided that his grandchild be the beneficiary of a trust.  Under the trust, during the grandchild’s life, the trustees were to make discretionary payments of net income and principal to or for the benefit of the grandchild and his issue.

When the grandchild died, the trustees were to pay principal and any accumulated or undistributed income to “such among [Settlor’s] issue” as the grandchild shall appoint in his will.  Any trust balance was to be disposed of pursuant to the settlor’s will. 

The grandchild asked the IRS to rule on two issues.  First, did the testamentary POA granted to the grandchild constitute a general POA under Section 2041(a)?  Second, did the existence, exercise, failure to fully exercise or partial or complete release of the grandchild’s POA to appoint principal and accumulated or undistributed income cause the value of the trust property to be included in the grandchild’s gross estate under Section 2041(a)?  The IRS answered both questions in the negative.

 

A General POA

Under Section 2041(a)(2), the value of a general POA created after Oct. 21, 1942 is generally includible in a decedent’s gross estate.  A general POA means a power that’s exercisable in favor of a decedent, his estate, his creditors or his estate’s creditors.  Treasury Regulations Section 20.2041-1(c)(1)(a) provide that a POA isn’t a general POA if, by its terms, it’s exercisable in favor of one or more designated persons or classes other than the decedent or his creditors, his estate or his estate’s creditors.

In this instance, the grandchild could appoint, by will, the trust principal and accumulated or undistributed income to a class consisting of the settlor’s issue.  The grandchild’s POA is testamentary; that is, he couldn’t appoint any part of the trust during his life.  And, “such among [Settlor’s] issue” as a class under the grandchild’s testamentary POA doesn’t include the grandchild’s estate or the creditors of his estate after his death.

The IRS thus ruled that the grandchild’s testamentary POA over trust principal and accumulated or undistributed income didn’t constitute a general POA under Section 2041(b)(1).  Moreover, the existence, exercise, failure to fully exercise, or partial or complete release of the grandchild’s POA over the principal and accumulated or undistributed income wouldn’t cause the value of the trust property to be included in the grandchild’s gross estate under Section 2041(a).

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