181 / If an income beneficiary has the power to invade the corpus of a trust, will the value of the trust assets over which the income beneficiary has the power be includable in the income beneficiary's gross estate upon the income beneficiary's death?

Subject to the exceptions noted below, the income beneficiary would be deemed to hold a general power of appointment if the income beneficiary had the power to invade the trust corpus for his or her benefit or for the benefit of his or her estate, creditors, or estate creditors. The following powers would not be deemed general powers of appointment for purposes of IRC Section 2041 if possessed by the income beneficiary:

1. A power to invade the corpus for the income beneficiary’s benefit if the power is limited by an “ascertainable standard” relating to the income beneficiary’s “health, education, support, or maintenance.”


2. A power of appointment created on or before October 21, 1942, which is exercisable by the income beneficiary only in conjunction with another person.


3. A power of appointment created after October 21, 1942, which is exercisable by the income beneficiary only in conjunction with the creator of the power or with a person having a substantial interest in the property subject to the power adverse to exercise of the power in favor of the income beneficiary.⁴

Five percent of a family trust (as well as 100 percent of a marital trust) was includable in the surviving spouse’s estate where the surviving spouse held a power of withdrawal over all of the marital trust and a contingent power to withdraw 5 percent annually from the family trust if the marital trust was exhausted.⁵

In the past, through a number of letter rulings, the IRS determined that a beneficiary who has the power to remove a trustee will be treated as holding any powers held by the trustee for purposes of determining whether the beneficiary holds a general power of appointment.⁶ However, for purposes of IRC Sections 2036 or 2038, the IRS no longer includes trust property in a decedent grantor’s estate where the grantor retains the right to replace the trustee but can replace the trustee with only an independent corporate trustee.⁷ More recently, the power to remove a trustee and replace the trustee with an independent corporate trustee was not treated as the retention of powers held by the trustee for purposes of IRC Section 2041.⁸ This may represent an extension by the IRS of its policy with regard to trustee removal under IRC Sections 2036 and 2038 to IRC Section 2041. Similarly, a beneficiary’s right to veto a replacement trustee and to petition a court for appointment of an independent replacement trustee was not treated as a general power of appointment.⁹

See Q 186 regarding the reciprocal trust doctrine.