In a power of appointment every word counts. (Estates & Trusts) (Column)by Slott, Edward A.
What is a General Power of
A general power of appointment is a right to use or appropriate property subject to that power. The power is conveyed by will or trust from one person (the donor, testator, or trustor) to another (the donee or holder). The holder of the power receives all rights to appoint the property to him- or herself or others in accordance with the terms of the will or trust instrument. If the power is exercisable in favor of the holder, it is a general power of appointment, and the value of all property subject to that power will be included in the gross estate of the holder at the date of death.
By definition, a general power of appointment is a power over the disposition of property which is "exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate" IRC Sec. 2041(b)(1), with certain exceptions. Exercise or release (other than by disclaimer) of a general power of appointment is a transfer subject to gift tax under IRC Sec. 2514. A general power of appointment created on or before October 21, 1942, which has either been released or not exercised will not be includible in the value of the gross estate of the holder IRC Sec. 2041(a)(1).
Power of appointment that are not general powers of appointment are known (interchangeably) as special, limited, or nongeneral powers. These special, limited, or nongeneral powers of appointment are the exceptions to the general rule (IRC Sec. 2041) of estate inclusion.
The key to meeting the exception provisions of IRC Sec. 2041 is to create a special or liminted power of appointment rather than a general one. To qualify as a special power of appointment, the power to appropriate property for the benefit of the decedent (holder) must be "limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent" IRC Sec. 2041(b)(1)(A).
The regulations further explain that the holder must be limited in his or her power to consume or invade the income or corpus for his or her own (or the estate's) benefit by a standard "reasonably measurable in terms of his health, education, or support (or any combination of them)" Regs. Sec. 20.2041-1(c)(2). The intent here is to provide the holder with the necessities of life "in reasonable comfort." However, the regulations specifically exclude any provisions or appropriations for the "comfort, welfare, or happiness of the holder." These latter conditions would not be considered "limited" when measured against the standard and would result in the power being considered a general power of appointment, fully includible in the value of the gross estate of the holder at death.
The following safe harbor phrases are specifically included in the exception regulations 20.2041-1(c)(2):
* "Support in reasonable comfort;"
* "Maintenance in health and reasonable comfort;"
* "Support in his accustomed manner of living;"
* "Education, including college and professional education;"
* "Medical, dental, hospital and nursing expenses and expenses of invalidism."
To qualify are power as a limited or special power, verbatim use of any of the above phrases insures compliance with the statutory limitations required by IRC Sec. 2041.
A power held jointly with the donor or a person having an adverse interest in the property is an exception under IRC Sec. 2041(b)(1)(C) and would not be a general power of appointment.
Plan to Use a Disclaimer
An effective estate planning technique to prevent any gift tax implications on lifetime transfers (releases) of property subject to a general power of appointment is the use of a disclaimer. The holder may disclaim all or part of his or her interest (in property that was subject to a prior transfer tax) without creating a further taxable transfer under the gift tax provisions of IRC Sec. 2514. The regulations state that a disclaimer or a renunciation of a general power of appointment is "not considered a release of the power" Regs. Sec. 20.2041-3(d)(6) and 25.2514-3(c)(5), (6) and would not be taxable. The disclaimer though would have to comply with the qualified disclaimer provisions of IRC Sec. 2518.
Estate of Norman H. Vissering v.
In a recent Florida case (96 T.C. No.33) it was determined that the decedent, Norman H. Vissering, possessed at his death a general power of appointment because of one word in the trust document.
The Facts. The decedent was a co-trustee with a bank of a revocable trust originally created by the decedent's mother on November 14, 1953. The trust agreement provided that the trust powers had to be executed jointly. The decedent's mother died in 1965 at which time the trust became a family trust. The beneficiaries were the decedent; the decedent's wife, son, and daughter; and the daughter's three children. Hence, the decedent was both a co-trustee and a beneficiary. The decedent developed Alzheimer's disease and moved in May 1984 with his daugther from Orlando, Florida to Texas and then to New Mexico where, on January 31, 1985, he was declared incapacitated under New Mexico law. The decedent's daughter was appointed guardian and conservator. When the decedent died (incapacitated) on March 31, 1985, the daughter was appointed executrix of the estate. Vissering was receiving the income of the trust until his death. The trust agreement, among other provisions, stated that the trustee had authority to use the trust principal for the "continued comfort, support, maintenance or education" of the beneficiaries.
The Decision. The only question in this case was whether the decedent possessed a general power of appointment within the meaning of IRC Sec. 2041(a)(2) at the time of death. The estate claimed that the trust agreement by its wording created a limited or special power of appointment meeting the exception provision under IRC Sec. 2041(b)(1)(A) which states that the power to consume or invade the trust for the decedent's own benefit (as beneficiary) was "limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent." The court rejected this argument solely because of the inclusion of the word "comfort" in the trust agreement. The court in its decision stated that the word "comfort" is "not contained in the statutory formulation found in Sec. 2041(b)(1)(A)," hence the trust "does not describe an ascertainable standard." The court added that even if they could assume that the word "comfort" did describe an ascertainable standard, such standard did not "relate solely to health, education, support, or maintenance of the decedent" as required by statute and regulations.
The court cited the fact that the regulations Sec. 20.2041-1(c)(2) specifically state that a "power to use the property for the comfort, welfare, or happiness of the holder" does not qualify for the exception as an ascertainable standard. However, the same regulations go on to say that the use of the word "comfort" in the phrase "support in reasonable comfort" is acceptable as a power limited by an ascertainable standard. Numerous other cases have been decided solely on the wording of the power including where and how the word "comfort" was used in various phrasings. The ruling in the Vissering case seemed to be based on the use of grammar to interpret tax law. The court actually cited "Webster's Ninth New Collegiate Dictionary (1985)" to define the word "continued" to determine its meaning as used in the Vissering trust in the phrase "continued comfort."
The estate raised other arguments as to the incapacity of the decedent to exercise the power and the fact that the decedent was a co-trustee with a bank. The court rejected the argument of incapacity, stating that there was no requirement that the holder be able to use the power. The term "exercisable" as used in IRC Sec. 2041(b)(1) refers only to the existence of the power and not to the holder's capacity to exercise it. Since the court did not consider the bank an adverse party, the argument of co-trustee was also rejected.
Exercise Extreme Care
In any estate planning engagement involving the use or creation of powers of appointment where the intention is to create a special of limited power of appointment meeting the exception povisions of Sec. 2041, extreme care and attention to the specific language should be exercised in order to prevent an unplanned estate tax. Wording that transforms what was intended into a general power may cause an estate tax nightmare. Every word and phrase should be checked for exception qualification. In most cases, the safe harbor phrases provided in the regulations should be used. In Vissering the deletion of one word could have save the estate over $700,000 in unnecessary estate tax. The use of a disclaimer whereby the decedent disclaimed his right to use the property for his comfort could also have corrected the problem before it was too late. As practitioners, we should review all documents and options concerning powers of appointment and never get too "comfortable!"
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