Springing the Delaware Tax Trap: Drafting Limited Powers of Appointment to Increase Asset Income Tax Basis

A sophisticated estate planning technique that is becoming increasingly utilized is the use of limited powers of appointment to “spring” a “Delaware Tax Trap.” The trap leverages a state’s rule against perpetuities and serves to increase asset basis without triggering a gift tax liability.

The technique involves drafting a limited power of appointment to a third party over some or all the assets in the estate, and having the third party exercise that power. The exercise causes the assets subject to the power to be included in the appointee’s estate. The basis of the assets receives a step-up, while creditor protection is maintained. While the limited power is most frequently utilized as a testamentary grant, there are circumstances in which an astute planner may have the appointee exercise the power inter vivos, such as when the exercise leads to a re-transfer of assets.

Since the Delaware Tax Trap technique works within the framework of a state or local rule against perpetuities, estate planners and counsel must ensure that the exercise of the limited power of appointment is sufficient to trigger a new perpetuities period to achieve the basis step-up results.

Listen as our experienced panel provides a practical and comprehensive guide to the income tax savings opportunities available through proper structuring of Delaware Tax Trap powers of appointment.

1. Using a Delaware Tax Trap powers of appointment designation to optimize basis
2. State considerations—making sure the appointment powers will trigger a new perpetuities period
3. Drafting suggestions
4. When to exercise the limited power of appointment to "spring the trap"
5. Illustrations of basis step-ups—the Trap in action

The panel will discuss these and other important issues:

• Drafting limited powers of appointment provisions to set the trap
• Making sure the trap springs on the appointee rather than the settlor
• How to make sure that exercise of the limited power of appointment conforms to the state and local perpetuities provisions so that the exercise starts a new perpetuities period
• Use of an inter vivos power of appointment to set the trap

Learning Objectives

After completing this course, you will be able to:

• Recognize the Delaware Tax Trap’s function to “bootstrap” exemption amounts that would otherwise be lost
• Identify states that have different perpetuities provisions
• Select limited powers of appointment that conform to IRC 2041 requirements
• Determine when exercising an inter vivos power of appointment would yield an optimal tax result

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Basic knowledge of taxation.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).