When Does a Power of Appointment Cause Property to be Includible in the Power Holder’s Estate?
If I include in my revocable trust a general power of appointment giving my wife the power to decide the beneficiaries of all assets in the trust and she dies before me, does such power require my revocable trust assets be included in her estate for both federal and Massachusetts estate tax purposes?
For the uninitiated, a power of appointment permits someone to give property to someone else. Powers of appointment can allow these gifts through the person’s will (known as “testamentary“) or during life (known as “inter vivos“). Most powers of appointment are testamentary.
This means, in your case, your wife would have the power through her will to choose who receives the property in the trust upon her death. She would exercise this power by making the gift (the “appointment”) in her will. Since your trust is revocable and you can always change it, your wife in fact would have no rights until after your death, when the trust becomes irrevocable. So, if you survive your wife, she in fact would not have a power of appointment and the property would not be includible in her estate.
Further, even if your wife survived you, the power of appointment probably would not cause the trust property to be in her taxable estate. In addition to being divided between inter vivos and testamentary, powers of appointment are also divided between general and limited. A general power of appointment would permit your wife to give the trust property to anyone, including herself, her creditors, and her estate. This would make the trust property includible in determining her estate taxes. But any limitation on the power of appointment would prevent this from happening. Even if it just said that the power is testamentary and your wife could appoint the trust property to any person, it would not cause the trust property to be in her estate. The limitation is that she could not appoint the property to her estate or creditors and this is sufficient.
Finally, for readers who are not in Massachusetts where the threshold for estate taxation is $1 million, this issue may be of little importance. With the federal threshold at $11.7 million and $23.4 million for couples (in 2021), almost no one pays federal estate taxes. So, unless you’re in a state like Massachusetts that has its own estate tax, this issue is probably irrelevant to you.