Powers of Appointment — Estate, Gift, and Income Tax Considerations (Portfolio 825)

Description

The Bloomberg Tax Portfolio, Powers of Appointment — Estate, Gift, and Income Tax Considerations, No. 825, analyzes the application of federal estate, gift, and income tax statutes to holders of powers of appointment, focusing on §§2041, 2514, and 671–678 of the Internal Revenue Code. The effect of the generation-skipping transfer tax on powers of appointment is also examined, as well as the taxation of property subject to powers of appointment under other provisions.

The Internal Revenue Code only subjects general powers of appointment to estate and gift tax. A general power of appointment generally is one in which the holder has the authority to appoint property in favor of any one or more of the following: (1) himself or herself; (2) his or her estate; (3) his or her creditors; or (4) the creditors of his or her estate. If the holder’s interest is a general power of appointment, estate and gift tax liability depends upon: (1) when the power was created (before or after October 21, 1942); and (2) the disposition the decedent made with regard to the power.
Further, the existence of a power of appointment can result in income and generation-skipping transfer tax consequences. For example, a person reserving a power of appointment (e.g., the grantor of a trust) may be taxed on the income attributable to the property subject to the power, whether or not that power is exercised. Also, the exercise of a general power of appointment that creates a generation-skipping transfer will subject the property to generation-skipping transfer tax, in addition to the estate or gift tax.

This Portfolio assists the practitioner in determining: (1) whether a power is a general power of appointment; (2) when the power is deemed created; and (3) the tax consequences to the power holder of general and nongeneral powers. The Portfolio also contains a section outlining certain planning ideas for powers of appointment, including: (1) how to draft powers of appointment; (2) using powers of appointment to create flexibility; and (3) generation-skipping transfer tax drafting tips.

This Portfolio may be cited as Cline, 825 T.M., Powers of Appointment — Estate, Gift, and Income Tax Considerations.

Table of Contents

I. Introduction
II. How and When a Power of Appointment Is Created
III. General Power of Appointment Defined
IV. Estate and Gift Taxation of General Powers of Appointment
V. Income Tax Consequences
VI. Generation-Skipping Transfer Tax Consequences
VII. Planning Ideas