Does a lifetime general power of appointment have income tax consequences?

Does a lifetime general power of appointment have income tax consequences?

• A. No
• B. Yes
• C. Sometimes
• D. Not sure

Answer: (B)

A lifetime general power of appointment triggers grantor trust treatment for income tax purposes. Because the power holder can appoint assets to themselves or their estate, the IRS treats the trust as effectively owned by that person for income tax. The result is that the trust’s income is taxed to the grantor on the grantor’s own return, at their individual tax rate, even if no money is actually distributed to the grantor. The trust itself doesn’t pay tax on that income. If the power weren’t general (limited to others and not to the holder or their estate), grantor trust status wouldn’t apply and the income would flow to the beneficiaries according to the trust’s rules.

A lifetime general power of appointment triggers grantor trust treatment for income tax purposes. Because the power holder can appoint assets to themselves or their estate, the IRS treats the trust as effectively owned by that person for income tax. The result is that the trust’s income is taxed to the grantor on the grantor’s own return, at their individual tax rate, even if no money is actually distributed to the grantor. The trust itself doesn’t pay tax on that income. If the power weren’t general (limited to others and not to the holder or their estate), grantor trust status wouldn’t apply and the income would flow to the beneficiaries according to the trust’s rules.