Power of Appointment: General or Limited?Doug H. Moy
September 2, 2009 — 3,064 views
The term "general power of appointment" is defined as a power exercisable in favor of the decedent, the decedent’s estate, the decedent’s creditors or creditors of the decedent’s estate [IRC §2041(b)(1)]. A power of appointment is presumed to be general, unless the settlor manifests an intent to exclude as appointees the donee, the creditors of the donee, the donee’s estate and the creditors of the donee’s estate [Restatement 2d of Property (Donative Transfers) §12.2 (1986)]. State law and the trust instrument determine whether a power is a general power of appointment. The rules of construction of Last Wills and trusts under state law are well-settled. If the language of a trust is unambiguous and expresses the intent of the settlor (grantor; trustor), it is unnecessary to construe the instrument because it speaks for itself. A court should give effect to every part of the instrument if the language is reasonably susceptible to a harmonious construction. The court must focus on the testator’s intent; and, in so doing, the intent must be drawn from the Last Will—not the Last Will from the intent. The court focuses not on what a testator may have intended to write but the meaning of the words actually used. Courts must not redraft Last Wills to vary or add provisions under the guise of construction of the language of the Last Will to reach a presumed intent [TAM 200907025 (Oct. 28, 2008), cites 1 through 6 redacted in original].
It is unequivocally imperative that language used to create either a general power of appointment or limited power of appointment [See Treas. Reg. §20.2041-1(c)(1)(b) and (c)(2) (Dec. 12, 1961)] be unambiguous and clearly stated to give effect to a general power of appointment as contrasted with a limited power of appointment. Depending upon one’s point of view, this imperative was not followed by the person designing the trust of the settlor in TAM 200907025. In this regard, the IRS observed that,
When a testator uses the same words in different parts of a will with reference to the same subject matter, it is presumed that the testator intended the words to have the same meaning unless the context indicates the testator used the words in a different sense. The court must presume the testator intended every word he used to have a meaning, and the court must give common words their plain meaning unless the context indicates they were used in another sense. A testator is presumed to have been familiar with the ordinary and natural meaning of the words used in the will. Cite 7; Cite 8 [redacted].
In TAM 200907025, settlors created a trust for the benefit of decedent. The trust provided that, at the time of the decedent’s death, the "Decedent’s equitable interest, ‘* * *’ is to pass to his heirs at law." Both the Service and the decedent’s estate agreed that this language granted decedent a testamentary power of appointment and that decedent exercised the power upon his death. The question, however, was whether the power of appointment was a general power of appointment.
The Service observed that,
To determine whether the Settlors intended to exclude the parties listed in IRC Sec. 2041(b) [i.e., the decedent, the decedent’s estate, the decedent’s creditors, or creditors of the decedent’s estate] as potential appointees, State law requires an examination of the words actually used in the instrument. Moreover, the words used by the settlor are presumed to have a meaning that is consistent with the plain meaning of the words. The language used by Settlors in * * * is unambiguous and clearly expresses the Settlors’ intent. The language does not restrict in any manner the Decedent’s ability to exercise the power of appointment in favor of his estate, his creditors, or the creditors of his estate. Therefore, we conclude that the power granted Decedent in Trust is a general power of appointment.
The decedent’s estate argued "...that the entire trust document rather than the specific language granting the power of appointment must be examined to determine Settlors’ intent. The estate concludes that such an examination reveals that Settlors did not intend to provide Decedent with a general power of appointment." The Service disregarded the estate’s argument by concluding
...that even if the Settlors’ intent were determined by an examination of the entire trust instrument, our conclusion that Decedent possessed a general power of appointment is clearly consistent with the overall intent specifically set forth in the four corners of the document. Beginning with the introductory language in the trust instrument, the Settlors explicitly provide that Trust is for the ‘* * *’" of the Decedent. No Trust provision allows for distributions to or for the benefit of anyone other than Decedent, including any of Decedent’s descendants. The language used to create the power of appointment permitted Decedent to determine, without restriction, who would receive Decedent’s entire interest in Trust. Allowing Decedent to control the disposition of the Trust Estate in this manner is consistent with Settlors’ goal as stated in the introductory language.
Moral of the story: If the settlor had wanted to limit the decedent’s power of appointment, language could have been crafted to accomplish such an objective, making the power of appointment limited—not general— in which case, the former would not have caused the value of the property subject to the power of appointment includable in the decedent’s gross estate for purposes of the federal estate tax.
Copyright © 2009 by Doug H. Moy. All rights reserved
Doug H. Moy
Doug H. Moy is a nationally recognized author, consulting specialist, seminar instructor and educator. He has an undergraduate degree from Willamette University and a Masters degree from Washington State University. Since 1979, Mr. Moy has consulted to attorneys, tax practitioners and their clients, as well as assisted practitioners representing clients before the IRS Conference of Right and Appeals Division and Settlement Conference Negotiations. He is noted for his ability to communicate his unparalleled knowledge and experience to practitioners at all levels in his field of expertise; namely, estate/gift taxation and planning, with special expertise in living trusts; community property; lottery prize winnings; structured settlement trusts; extricating clients from abusive trust tax shelters; designing effective estate plans; and preparation of Form 706 Estate Tax Returns and 709 Gift Tax Returns. He offers particular assistance and exceptional skill designing creative, practical solutions to challenging and difficult estate planning situations.