835 / What is a general power of appointment?

The IRC defines a general power of appointment as a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. Here the “decedent” is, of course, the donee – that is, the holder of the power.

A power exercisable in favor of the holder, his estate, his creditors, or the creditors of his estate is a general power of appointment; it need not be exercisable in favor of both.¹ Thus, if the holder can withdraw all or part of the principal for any purpose, he has a general power of appointment exercisable in favor of himself. Or, if he can will (or bequeath) the property to anyone he wishes, including his own estate, he has a general power of appointment exercisable in favor of his estate.

However, a power to “consume, invade, or appropriate” the principal for the holder’s own benefit is not a general power of appointment if it is limited by an “ascertainable standard” relating to the holder’s “health, education, support, or maintenance.” According to the regulations, “A power is limited by such a standard if the extent of the holder’s duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them). As used in this subparagraph, the words ‘support’ and ‘maintenance’ are synonymous and their meaning is not limited to the bare necessities of life. A power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard.”

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Planning Point: To ensure a power of appointment is limited by an ascertainable standard, the drafter must use the exact terms referenced in the regulations. Too much is at stake to use terms the drafter may believe are “similar.”

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Examples of powers which are limited by the requisite standard are powers exercisable for the holder’s ‘support,’ ‘support in reasonable comfort,’ ‘maintenance in health and reasonable comfort,’ ‘support in his accustomed manner of living,’ ‘education, including college and professional education,’ ‘health,’ and ‘medical, dental, hospital and nursing expenses and expenses of invalidism.’ In determining whether a power is limited by an ascertainable standard, it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.”²

A pre-1942 power is not considered to be a “general” power of appointment if it is exercisable only in conjunction with another person. And a post-1942 power is not considered to be a “general” power of appointment if it is exercisable only in conjunction with the donor of the power or only in conjunction with someone who has a substantial interest in the property which is adverse to the holder’s interest.³ It has been held that a trustee does not have a substantial and adverse interest simply because the trust is a taker in default of exercise of the power, so long as the trustee himself is not a beneficiary of the trust.⁴

In the past, a number of letter rulings have determined that a beneficiary who has the power to remove a trustee will be treated as holding any powers held by the trustee for purpose of determining whether the beneficiary holds a general power of appointment.⁵ However, for purposes of IRC Section 2036 or IRC Section 2038, the Service will no longer include trust property in a decedent grantor’s estate where the grantor retains the right to replace the trustee but can replace the trustee with an independent trustee “that was not related or subordinate to the decedent (within the meaning of Section 672(c)), the decedent would not have retained a trustee’s discretionary control over trust income.”⁶

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 2041.⁷ This represents an extension by the Service of its new policy with regard to trustee removal under IRC Section 2036 and IRC Section 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.⁸

Any power of appointment which is not a general power is called a “special” or “limited” power. A special power of appointment is not taxable in the holder’s estate regardless of when it was created.

Post-1942 Power: Generally

The mere possession at death of a post-1942 general power of appointment will cause the property to be included in the holder’s gross estate. Thus:

(1)     If the decedent had a general power of appointment which he could have exercised by will in favor of his estate, the property subject to the power is taxable in his estate whether or not he exercised the power; or

(2)     If, immediately before his death, the decedent had a general power of appointment which he could have exercised in his own favor during his lifetime, the property subject to the power is taxable in his estate.

But even though the decedent does not still possess the power at the time of his death, if he has had such a power and has exercised or released it or allowed it to lapse during his lifetime, the property which was subject to the power may, under some circumstances, be included in his gross estate.

Thus, if the decedent once possessed a general power of appointment and has exercised or released it in such a way that, had the property been his own, it would have been included in his gross estate under one of the IRC Sections 2035 through 2038, then the property that was subject to the power is includable in his gross estate.

Pre-1942 Power

Prior to 1942, property subject to a general power of appointment was taxable in the donee’s estate only if the power was exercised. Thus, the property is includable in the holder’s gross estate only if (1) he has exercised the power by will at his death, or (2) he has exercised the power during life in such a way that, had the property been owned by him, it would have been includable under one of the IRC Sections 2035-2038.