California Code of Regulations › Title 18 - Public Revenues › Division 2.5 - State Controller › Chapter 1 - Inheritance Tax › Article 4.4 - Powers of Appointment › Section 13697 - Inter Vivos Exercise, Release, Lapse and Disclaimer of Powers

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) In General.
Under Revenue and Taxation Code Section
					 13697
					 property subject to a general power of appointment is a transfer subject to
					 inheritance tax even though the deceased donee of the power does not have the
					 power at the date of his death, if during his life he exercised or released the
					 power under circumstances such that if it was a transfer of property owned by
					 the decedent such transfer would be subject to tax under Revenue and Taxation
					 Code Sections
					 13641
					 through
					 13648.
					 A lapse of a general power of appointment is considered to be a release of the
					 power to the extent set forth in subparagraph (b) herein. An unequivocal
					 disclaimer or renunciation of a general power of appointment is not considered
					 to be a release for this purpose.
(b) Lapse of Power of Appointment.
The failure to exercise a power of appointment within a
					 specified time, so that the power lapses, constitutes a release of the power.
					 However, Revenue and Taxation Code Section
					 13697
					 provides that such a lapse during any calendar year of decedent's life is
					 treated as a release only to the extent that the property which could have been
					 appointed by exercise of such lapsed power exceeds the greater of (i) $5,000 or
					 (ii) 5 percent of the aggregate value, at the time of the lapse, of the assets
					 out of which, or the proceeds of which, the exercise of the lapsed power could
					 have been satisfied.
This regulation may be illustrated by the following
					 examples:
EXAMPLE (1).
A transferred property worth $200,000 in trust providing
					 for payment of income to D for life with remainder to D's issue. D had a
					 noncumulative right to withdraw $10,000 a year from the principal of the trust
					 fund (which neither increased nor decreased in value prior to D's death). The
					 failure of D to exercise his right of withdrawal will not result in an inter
					 vivos transfer subject to inheritance tax with respect to the power to withdraw
					 $10,000 which lapses each year before the year of D's death inasmuch as it does
					 not exceed 5 percent of the principal of the trust at the time of the lapse. At
					 D's death there will be subjected to tax by virtue of his possession of the
					 power at death the $10,000 which he was entitled to withdraw for the year of
					 his death less any amount which he may have taken during that year.
EXAMPLE (2).
If in the preceding example D had possessed the right to
					 withdraw $15,000 of the principal annually, the failure to exercise such power
					 in any calendar year will be considered a release of the power to the extent of
					 the excess of the amount subject to withdrawal over 5 percent of the trust fund
					 (in this example, $5,000, assuming the trust fund is worth $200,000 at the time
					 of the lapse). Since each lapse is treated as though D had exercised dominion
					 over the trust property by making a transfer of principal reserving the income
					 therefrom for his life, the value of the trust property is taxable at D's death
					 as a transfer with a reserved life estate but only to the extent of the excess
					 of the amount subject to withdrawal over $5,000 or 5% of the trust fund
					 whichever is greater.
(c)
				  Lapse of Power, Portion Taxable.
Where the lapse of a power of appointment is includible as
					 a transfer at decedent's death the amount taxed is determined as that portion
					 of the date of death value of the trust corpus which the taxable portion at the
					 date of the lapse bears to the corpus at that time. For example, if the life
					 beneficiary of a trust had a right exercisable only during one calendar year to
					 withdraw $50,000 from the corpus of a trust, which he did not exercise, and if
					 at the end of the year the corpus was worth $800,000, the taxable portion over
					 which the power lapsed is $10,000 (the excess of $50,000 over 5 percent of the
					 corpus), or 
					 1/80 of the
					 total value. On the decedent's death, if the total value of the
					 corpus(excluding income accumulated after the lapse of the power) was
					 $1,200,000, 
					 1/80 or
					 $15,000 would be includible as a taxable transfer. However, if the total value
					 was then $600,000, only $7,500 ( 
					 1/80 of
					 $600,000) would be includible.
(d) Lapse of Power for More Than One Year.
If the failure to exercise a power, such as a right of
					 withdrawal, occurs in more than a single year, the proportion of the property
					 over which the power lapsed which is treated as a taxable disposition will be
					 determined separately for each such year. The aggregate of the taxable
					 proportion for all such years, valued in accordance with the above principles,
					 will be includible as a taxable transfer by reason of the lapse. The includible
					 amount, however, shall not exceed the aggregate value of the assets out of
					 which, or the proceeds of which, the exercise of the power could have been
					 satisfied, valued as of the date of the decedent's death.
(e) Disclaimer or Renunciation of Power of
				  Appointment.
A disclaimer or renunciation of a general power of
					 appointment is not deemed to be a release of the power. The disclaimer or
					 renunciation must be unequivocal. A disclaimer is a complete and unqualified
					 refusal to accept the rights to which one is entitled. There can be no
					 disclaimer or renunciation of a power after its acceptance. In the absence of
					 facts to the contrary, the failure to renounce or disclaim within a reasonable
					 time after learning of its existence will be presumed to constitute an
					 acceptance of the power. The disclaimer of a power on or after August 16, 1972
					 must comply in manner and form to the provisions of Chapter 11 (commencing with
					 Section 190) of Division 1 of the Probate
					 Code.
NOTE: Reference: Section
					 13697,
					 Revenue and Taxation Code.