Probate & Trust Law Section Conference Manual ... - Minnesota CLE

ii. Post-1986 States: Alaska, 10 Delaware, 11 Kentucky, 12 New Jersey, 13 Missouri, 14
New Hampshire, 15 and North Carolina. 16
iii. Rhode Island: Rhode Island has completely abrogated its rule without any rule
against alienation, thereby addressing the “timing” issue but not the “vesting”
issue. 17
b. Limited Powers of Appointment/Delaware Tax Trap
i. Introduction: The Delaware Tax Trap may be a concern for a trust that is
created in a state in which the trust might last beyond the common law RAP or
the Uniform Statutory Rule Against Perpetuity (USRAP). This is not just an issue
for Delaware trusts. Pursuant to Delaware statute, the exercise of a limited or
general power of appointment usually begins a new perpetuities period. 18 Prior to
this, Delaware statutes provided the opportunity through the exercise of
successively limited powers of appointments over successive generations, thus
allowing for a perpetual trust without federal transfer taxes. 19 IRC § 2514(d) was
enacted in 1951 to prevent this from happening. The current IRC section dealing
with this issue is IRC § 2041(a)(3).
ii. History – IRC § 2041(a)(3): The legislative history of this statute makes clear
that the Delaware power of appointment statute was Congress’ intended target (S.
Rep. No. 82-382)(1951).
iii. Current – IRC § 2041(a)(3): Pursuant to IRC § 2041(a)(3), a trust will be
subject to federal estate tax at the death of a beneficiary who has a limited power
of appointment over the trust if the beneficiary:
[E]xercises a power of appointment created after October 21, 1942, by creating
another power of appointment which under the applicable local law can be validly
exercised so as to postpone the vesting of any estate or interest in such property, or
suspend the absolute ownership or power of alienation of such property, for a period
ascertainable without regard to the date of the creation of the first power.
iv. Summary: 20 For a trust to be includable in the gross estate of the donee of a
limited power of appointment created after October 21, 1942, the donee must:
1. Exercise the power of appointment;
10 ALASKA STAT. §§ 34.27.100, 34.27.051.
11 DEL. CODE ANN. tit. 25, § 503.
12 KY. REV. STAT. ANN. §§ 381.224; 381.225.
13 N.J. STAT. ANN. §§ 46:2F-9 – 46:2F-11.
14 MO. REV. STAT. § 456.025.
15 N.H. REV. STAT. ANN. §§ 564:24, 547:3-k.
16 N.C. GEN. STAT. §§ 41-15 – 41-27.
17 R.I. GEN. LAWS § 34-11-38.
18 DEL. CODE ANN. tit. 25, § 503.
19 38 Del. Laws 198 (1933).
20 Treas. Reg. § 20-8041-3(e).
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