California Code of Regulations › Title 18 - Public Revenues › Division 2.5 - State Controller › Chapter 1 - Inheritance Tax › Article 4.4 - Powers of Appointment › Section 13694 - Gift of Power of Appointment

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
The gift of a power of appointment is commonly referred to
					 as the creation of a power of appointment in that the donor of the power
					 creates a means of transferring a property interest by giving the donee the
					 power to designate the distribution thereof. Such a creation and gift made in
					 conjunction with a disposition of property otherwise taxable is treated as a
					 taxable transfer from the donor to the donee without reference to the
					 appointees who may be designated to take through an exercise of the power by
					 the donee and without reference to those who would take in absence of an
					 exercise. Thus the transfer is treated in the same manner as an outright gift
					 of property to the donee. This is true regardless of whether the transfer
					 involves either a general power of appointment or a limited power of
					 appointment. Taxability is subject to the following exceptions in Revenue and
					 Taxation Code Section
					 13694.
(a) Community Property Exclusion to
				  Spouse--Transfer Coupled with Power of Appointment Made by Decedents Dying
				  Prior to January 1, 1976.
With reference to decedents dying prior to January 1, 1976,
					 where a power of appointment is given by a donor to the donor's spouse over any
					 portion of the donor's half interest in community property the value of any
					 interest given other than the power of appointment itself up to but not
					 exceeding the value of a life estate to the spouse is excluded from taxation.
					 Thus, the taxability of a transfer of a power of appointment in community
					 property from one spouse to the other is reduced by the value of other
					 interests but not to exceed the value of a life estate where other interests in
					 the same property are given to the spouse which do not amount to a power of
					 appointment. For example, if a surviving spouse receives a life estate in the
					 decedent's half of their community property together with a power to appoint
					 the remainder, the value of the life estate would be excluded from tax and the
					 value of the remainder would be taxable. On the other hand, if the surviving
					 spouse receives no specified life estate but is given a power to revoke during
					 life with a testamentary power to appoint the remainder, none of the community
					 property so covered would be excluded from tax because both the power to revoke
					 and the testamentary power to appoint each come within the definition of a
					 power of appointment and the power to revoke is not an interest other than a
					 power of appointment. If, in this latter case the surviving spouse is also
					 given a life estate in conjunction with the power to revoke, the value of the
					 life estate is excluded from tax.
A life estate may be implied from the nature of the
					 transfer. Thus, if a power of appointment in community property is given to a
					 spouse by way of a power to consume during lifetime it is considered to include
					 an implied life estate for this purpose and an exclusion is allowed for the
					 value of a life estate to the spouse.
To qualify for this exclusion the interest given which is
					 other than the power of appointment itself need not be in the nature of a life
					 estate. Revenue and Taxation Code Section
					 13694
					 merely requires that it be any interest other than the power itself. For
					 example, such additional interest may be in the form of an annuity of specified
					 amounts or for periodic payments for a time certain or payment at a specified
					 future time. In such cases the exclusion is limited to the value of a life
					 estate or the value of the additional interest whichever is less.
For purposes of computing the life estate exclusion under
					 this exception in Revenue and Taxation Code Section
					 13694,
					 the valuation principles of Revenue and Taxation Code Sections
					 13953
					 and
					 13954
					 will apply.
These provisions and illustrations do not apply to joint
					 trustee bank or savings and loan accounts between spouses which are treated as
					 joint tenancy accounts under Revenue and Taxation Code Section
					 13671.
(b) Discretionary Power of Trustee to Make
				  Certain Payments of Income or Principal.
For the purpose of treating the creation of a power of
					 appointment as a transfer from the donor to the donee of the power certain
					 discretionary powers granted to a trustee are not considered to be powers of
					 appointment. These consist of powers limited to making discretionary payments
					 of principal or income for the benefit of a trust beneficiary or beneficiaries
					 other than the trustee. Trusts containing such powers are often termed
					 "sprinkling" or "spraying" trusts and this exception to the treatment of these
					 powers as powers of appointment is limited to those situations in which the
					 trust instrument specifically provides that the trustee or trustees shall have
					 discretionary power to make payments for the benefit of a trust beneficiary
					 other than the trustee. Included are those sprinkling trust situations in which
					 there is a limited and continuing discretion to determine from time to time
					 during the existence of the trust to make unequal payments to one or more of
					 the trust beneficiaries and the power to effect a payment of trust corpus by
					 terminating the trust, in whole or in part.
Where this exception as to discretionary payments is met
					 the tax is determined upon a transfer from the donor to the ultimate
					 beneficiaries and is treated as a transfer subject to the contingent future
					 identification of those beneficiaries within the provisions of Revenue and
					 Taxation Code Section
					 13411.
					 See also Revenue and Taxation Code Section
					 14191
					 whereby the contingencies can be settled upon a compromise at the time the tax
					 is fixed.
Where the power to make discretionary payments of income or
					 principal may be exercised in favor of the trustee, the trustee will be
					 considered as having a general power of appointment; and where the trustee has
					 the power to appoint the beneficiary (or beneficiaries) of the trust from among
					 a designated class of beneficiaries, which does not include the trustee, his
					 estate, his creditors, or creditors of his estate, the trustee will be
					 considered as having a limited power of appointment.
NOTE: Reference: Section
					 13694,
					 Revenue and Taxation Code.