General Power Of Appointment

Bartholomew Fenn is in his second marriage. He wants his wife Ilse to receive all the income from a $5,000,000 trust for her lifetime, wants the remainder to pass to the children of his first marriage, and wants the trust to qualify for the federal estate tax marital deduction at his death. His attorney recommends a QTIP trust with the proper election. Which statement is correct?

1. A.For the trust to qualify, Ilse must hold a general power of appointment over the trust corpus.Incorrect. That describes a general power of appointment marital trust, which necessarily lets the surviving spouse redirect the remainder. The QTIP election exists specifically so that is not required.
2. B.The trust qualifies for the marital deduction at Bartholomew's death and its value escapes estate tax in Ilse's estate as well.Incorrect. The marital deduction defers rather than eliminates the tax. Electing QTIP property is included in the surviving spouse's gross estate at her death.
3. C.Ilse must receive all trust income at least annually and no one may appoint any part of the trust to anyone other than her during her life; the executor's election secures the marital deduction, and the consequence is inclusion of the remaining value in Ilse's gross estate while Bartholomew controls the remainder.Correct. This states the qualifying conditions, the elective nature of the treatment, and the trade-off - deduction now in exchange for inclusion in the survivor's estate later.
4. D.Because Ilse cannot control the disposition of the remainder, the trust cannot qualify for any marital deduction.Incorrect. That would be true of an ordinary terminable interest, but the QTIP election is the statutory exception permitting a marital deduction without giving the survivor control of the remainder.

Why: A qualified terminable interest property trust solves exactly this problem. Ilse must be entitled to all the trust income, payable at least annually, for life, and no person - including Ilse - may hold a power to appoint any part of the trust property to anyone other than Ilse during her lifetime. If the executor makes the QTIP election on the estate tax return, the trust qualifies for the marital deduction even though Ilse has no control over the remainder, so no estate tax is due at Bartholomew's death. The price of that deduction is that the trust's remaining value is included in Ilse's gross estate when she dies. Bartholomew, meanwhile, keeps the remainder locked for his first-marriage children.

Under her late husband's trust, Cordelia Marchbanks receives all of the income for life. The trust instrument also permits her, at any time and for any purpose she chooses, to withdraw principal for her own benefit or for anyone else's. She never exercises that right. At her death the trust's remaining $3,000,000 passes to her nieces. For federal estate tax purposes:

1. A.Nothing is includible, because Cordelia never exercised the withdrawal right.Incorrect. Property subject to a general power of appointment is included in the powerholder's gross estate whether or not the power was exercised. Holding the power is what matters.
2. B.The full $3,000,000 is includible in her gross estate, because an unrestricted right to withdraw principal for her own benefit is a general power of appointment.Correct. A power exercisable in favor of the holder is general, and property subject to a general power held at death is included in the holder's estate regardless of exercise.
3. C.Only the actuarial value of her life income interest is includible.Incorrect. A life income interest alone would terminate at death and generally would not be included, but the general power over principal changes the analysis and pulls in the entire corpus.
4. D.Nothing is includible, because her husband created and funded the trust rather than Cordelia.Incorrect. Who funded the trust does not control. The powers the survivor holds at her death determine inclusion in her estate.

Why: A power of appointment is GENERAL if it can be exercised in favor of the holder, the holder's estate, the holder's creditors, or the creditors of the holder's estate. Cordelia may withdraw principal for her own benefit for any purpose, so she holds a general power over the entire corpus. Property subject to a general power of appointment held at death is included in the powerholder's gross estate whether or not the power was ever exercised - the ability to take the property is treated as ownership of it. The full $3,000,000 is therefore includible in her estate.