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

the date of my death. In the event of termination of a Trust under this provision, the assets shall be
distributed per stirpes to my descendants who were permissible recipients of the Trust income
immediately prior to such termination.
i Delaware Tax Trap- IRC Sec. 2041(a)(3) and Sec. 2514(d).
IRC Section 2041(a)(3) and the corresponding gift tax provision, IRC Section 2514(d)
provides that a the exercise of a limited power of appointment which extends the perpetuities period
of the appointed trust beyond the perpetuities period of the appointing trust causes the exercise of the
power to be taxed as a general power of appointment.
The Delaware Tax Trap can be triggered if the beneficiary exercises a limited power of appointment
through the creation of an appointed trust in which the beneficiary of the appointed trust has a
presently exercisable general power of appointment. For example: if under Trust No. 1, beneficiary
A has a presently exercisable (inter vivos) limited power of appointment that permits A to appoint
property of Trust No. 1 among one or more members of a certain class of other beneficiaries,
including beneficiary B, and beneficiary A exercises the power and appoints property of Trust No. 1
by creating an appointed trust (Trust No. 2) for the benefit of B, and the provisions of Trust No. 2
give B the power to withdraw any portion of the property of Trust No. 2, then A’s exercise of the
limited power under Trust No. 1 is treated under either IRC Section 2514(d) as the exercise of a
general power of appointment, and, therefore, a transfer subject to federal gift tax. The common law
permitted such an exercise, and it is permitted under Minnesota’s Statutory Rule Against Perpetuities
by M.S. 501A.04 Subdivision (7).
Advantages.
Triggered By Beneficiary, Not The Trustee. The power is triggered through the exercise of the
power by the beneficiary, and not through the exercise of discretion by the independent trustee.
No Property Diversion. It does not result in diversion of property from class of recipients
selected by settlor, and it can be used even when the class of intended beneficiaries is quite restricted.
No Monitoring. It does not require monitoring by the fiduciary.
Formula Exercise. Since the power is only taxable to the extent exercised, it can be exercised by
a formula designed to reduce all wealth transfer taxes to the lowest possible amount.
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