Which statement about the taxation of a testamentary general power of appointment is true?

Which statement about the taxation of a testamentary general power of appointment is true?

• A. She will be taxed on a percentage of the income only if the power is exercised.
• B. She will be taxed on a fraction or percentage of both the ordinary income and capital gains for the period of time the power is available but not exercised.
• C. She will not be taxed on income as a result of the power, but the full value of the property subject to the power will be included in her estate.
• D. She will be taxed on a fraction or percentage of both the ordinary income and capital gains for the period of time the power is available only if exercised.

Answer: (C)

A testamentary general power of appointment affects estate tax, not ordinary income tax. When someone holds a general power to appoint property (even if that power only comes into play after death), the property subject to that power is treated as if the powerholder owns it for estate tax purposes. With a testamentary general power, the full value of the property subject to the power is included in the powerholder’s gross estate at death. That means the key tax consequence is inclusion in estate, not a calculation of income or gains taxed during the period the power exists. Therefore, the holder isn’t taxed on the trust’s income simply because the power is present; the income tax implications come from how the trust or its beneficiaries are taxed, not from possessing the power itself. The essential point is that estate tax inclusion occurs for the full value of the property, not fractional income tax based on time or exercise.

A testamentary general power of appointment affects estate tax, not ordinary income tax. When someone holds a general power to appoint property (even if that power only comes into play after death), the property subject to that power is treated as if the powerholder owns it for estate tax purposes. With a testamentary general power, the full value of the property subject to the power is included in the powerholder’s gross estate at death. That means the key tax consequence is inclusion in estate, not a calculation of income or gains taxed during the period the power exists.

Therefore, the holder isn’t taxed on the trust’s income simply because the power is present; the income tax implications come from how the trust or its beneficiaries are taxed, not from possessing the power itself. The essential point is that estate tax inclusion occurs for the full value of the property, not fractional income tax based on time or exercise.