general power of appointment

Should restrictions be attached to a general power of appointment?

The “general" power of appointment is distinguished from the “special (or limited)" power of appointment by its tax consequence. A power of appointment is general if it grants the holder the ability to appoint (that is, to give) the property subject to the power to any one or more of (1) the holder, (2) his or her creditors, (3) his or her estate, or (4) the creditors of his or her estate. A power which includes any one of these four classes, and permits the holder to appoint to anyone else as well, is a general power of appointment. By contrast, a power which excludes the four classes but permits the holder to give the property to anyone else in the world is still “limited" for U.S. estate and gift tax purposes.

The tax effect of the general, as opposed to the special or limited, power is that the property subject to the power is treated as owned by the power holder for gift and estate tax purposes; that is, the holder's exercise or release of a general power (and, subject to certain limitations, the holder's permitting the power to lapse) is a gift for federal gift tax purposes, and property subject to a general power at the holder's death is included in the holder's estate for federal estate tax purposes. As a result, a general power typically is conferred with the express intention to produce these tax consequences and otherwise is carefully avoided. Indeed, because a power which is “limited" for tax purposes still permits appointment among a very large class, there is rarely a non-tax reason to confer a general power. The creditors of the holder of a general power who has the current right to appoint to himself or his creditors may be able to reach the property subject to the power. Thus, if the conferral of a general power is desired, it may be preferable to restrict the provision which causes the power to be general to the ability to appoint to the holder's estate.

Stephen F. Lappert, Partner, Trusts and Estates Department, Carter Ledyard & Milburn LLP, New York, NY