Perpetuities and Power-of-Appointment Issues: The Delaware Tax Trap, Savings Clauses, and Special Administration of Appointed Assets

• Author: Jerold I. Horn
• Profession: Lawyer
• Pages: 549-574

549

PART ON E

APPLICATION OF DELAWARE TAX TRAP TO

EXERCISE OF NONGENERAL POWERS OF

APPOINTMENT IF RULE AGAINST PERPETUITIES

IS (I) COMMON-LAW, (II) ELECTED NOT TO APPLY,

(III) TERM OF YEARS, OR (IV) ABOLISHED

Code Section 2041(a)(3) codies the operation of the Delaware Tax Trap upon the death

of a person who exercises a nongeneral power of appointment. According to Code Sec-

tion 2041(a)(3), a nongeneral power of appointment is treated as a general power of

appointment if the exercise of the nongeneral power creates a power of appointment

that, according to local law, is exercisable to affect title for a period ascertainable without

regard to the date of the creation of the exercised power. Therefore, the Delaware Tax

Trap presents the potential pitfall of unnecessary exposure to estate tax. However, the

Delaware Tax Trap also presents the potential benets of (i) subjection of transfers to

estate tax of a lesser amount instead of generation-skipping tax of a larger amount and

(ii) improvement of bases for income tax purposes. The donee of a nongeneral power of

appointment should use the Trap purposefully rather than inadvertently.

I. FORM 19.1: EXERCISE OF CERTAIN

POWER S OF APPOINTMEN T

Section 2.05. Property Subject to Certain Powers of Appointment. I am granted a

power of appointment (“First Power”) at Section 3.06 of the Declaration of Trust

19

Perpetuities and Power-of-

Appointment Issues:

The Delaware Tax Trap, Savings Clauses, and

Special Administration of Appointed Assets

Chapter 19550

of JOHN H. SMITH dated January 15, 1989, with respect to the trust estate of

the Portion One Family Trust named for me. I am granted a power of appoint-

ment (“Second Power”) at Section 3.07 of the Declaration of Trust of JOHN H.

SMITH dated January 15, 1989, with respect to the trust estate of the Portion

Two Family Trust named for me. If any descendant of John H. Smith survives

me, I exercise the First Power by directing that, upon my death, all property

that is subject to the First Power shall be distributed to the Trustee of the First

Appointment Trust created according to Section 3.08 of the Trust described

in Section 2.04 of this Will. If any descendant of John H. Smith survives me,

I exercise the Second Power by directing that, upon my death, all property that

is subject to the Second Power shall be distributed to the Trustee of the Second

Appointment Trust created according to Section 3.09 of the Trust described in

Section 2.04 of this Will.

a [I specically intend my exercise of the [#A] Power to cause Section 2041(a)(3)

of the Code to treat the [#A] Power as a general power of appointment for pur-

poses of determining the United States estate tax payable because of my death.]

Notwithstanding anything to the contrary,

(A) If

(i) absent this subsection (A), my exercise of a power of appointment

b [(other than [#B])]

according to the preceding portion of this Section would subject any

property to another power of appointment,

(ii) absent my exercise, the rst power that is described in (i) would

not constitute a general power of appointment as dened in Section 2041

of the Code, and

(iii) absent this subsection (A), the donee of the other power pres-

ently could distribute the property to himself or herself, or for any other

reason the other power would constitute a general power of appointment

presently exercisable, I appoint the property outright to the donee of the

other power; and

(B) If my exercise (according to this Section) of any power of appointment

(“exercised power”)

c [, other than [#B],]

creates another power of appointment (“other power”), the other power shall

not be exercisable or exercised, directly or indirectly, to postpone the vesting of

any estate or interest in, or suspend the absolute ownership or power of alien-

ation of, any property (or any proceeds of any property) with respect to which

I exercised the exercised power, for a period ascertainable without regard to

the date of the creation of the exercised power, within the meaning of Section