Powers of Appointment: Trust Power or Tax Trap?Posted December 10th, 2011
Trusts offer your clients asset protection and tax benefits, giving them the power to say how and when their cash and property are distributed. They also offer a mechanism for putting the decision-making process in the hands of someone other than the grantor—the power of appointment (POA).
But for all their flexibility POAs also have the tendency to throw estate plans off track, resulting in unplanned-for tax liability and unforeseen results.
Although a person who has a general power of appointment over property is not said to own the property, if he dies holding the POA, his gross estate can include the value of that property. And that is where the dispute in Estate of Chancellor v. Comm’r, T.C. Memo 2011-172 (2011) begins.
A “general power of appointment” is a broad-based POA that gives a person the right to direct a distribution of property to himself, “his estate, his creditors, or the creditors of his estate.”
The Tax Code includes in a decedent’s estate the value of property over which a decedent held a POA, because holding a general POA over trust corpus is essentially equivalent to owning the property outright.
For a complete discussion of POA’s and Estate of Chancellor v. Comm’r, T.C. Memo 2011-172 (2011) go to Advisor’s Journal.