[Code of Federal Regulations]
[Title 26, Volume 14]
[Revised as of January 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR20.2041-2]

[Page 329-331]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 20_ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954--Table of Contents
 
Sec.  20.2041-2  Powers of appointment created on or before 
October 21, 1942.

    (a) In general. Property subject to a general power of appointment 
created on or before October 21, 1942, is includable in the gross estate 
of the holder of the power under section 2041 only if he exercised the 
power under specified circumstances. Section 2041(a)(1) requires that 
there be included in the gross estate of a decedent the value of 
property subject to such a power only if the power is exercised by the 
decedent either (1) by will, or (2) by a disposition which is of such 
nature that if it were a transfer of property owned by the decedent, the 
property would be includable in the decedent's gross estate under 
section 2035 (relating to transfers

[[Page 330]]

in contemplation of death), 2036 (relating to transfers with retained 
life estate), 2037 (relating to transfers taking effect at death), or 
2038 (relating to revocable transfers). See paragraphs (b), (c), and (d) 
of Sec.  20.2041-1 for the definition of various terms used in this 
section.
    (b) Joint powers created on or before October 21, 1942. Section 
2041(b)(1)(B) provides that a power created on or before October 21, 
1942, which at the time of the exercise is not exercisable by the 
decedent except in conjunction with another person, is not deemed a 
general power of appointment.
    (c) Exercise during life. The circumstances under which section 2041 
applies to the exercise other than by will of a general power of 
appointment created on or before October 21, 1942, are set forth in 
paragraph (a) of this section. In this connection, the rules of sections 
2035 through 2038 which are to be applied are those in effect on the 
date of the decedent's death which are applicable to transfers made on 
the date when the exercised of the power occurred. Those rules are to be 
applied in determining the extent to which and the conditions under 
which a disposition is considered a transfer of property. The 
application of this paragraph may be illustrated by the following 
examples:

    Example (1). A decedent in 1951 exercised a general power of 
appointment created in 1940, reserving no interest in or power over the 
property subject to the general power. The decedent died in 1956. Since 
the exercise was not made within three years before the decedent's 
death, no part of the property is includable in his gross estate. See 
section 2035(b), relating to transfers in contemplation of death.
    Example (2). S created a trust in 1930 to pay the income to A for 
life, remainder as B appoints by an instrument filed with the trustee 
during B's lifetime, and in default of appointment remainder to C. B 
exercised the power in 1955 by directing that after A's death the income 
be paid to himself for life with remainder to C. If B dies after A, the 
entire value of the trust property would be included in B's gross 
estate, since such a disposition if it were a transfer of property owned 
by B would cause the property to be included in his gross estate under 
section 2036(a)(1). If B dies before A, the value of the trust property 
less the value of A's life estate would be included in B's gross estate 
for the same reason.
    Example (3). S created a trust in 1940 to pay the income to A for 
life, remainder as A appoints by an instrument filed with the trustee 
during A's lifetime. A exercised the trustee during A's lifetime. A 
exercised the power in 1955, five years before his death, reserving the 
right of revocation. The exercise, if not revoked before death, will 
cause the property subject to the power to be included in A's gross 
estate under section 2041(a)(1), since such a disposition if it were a 
transfer of property owned by A would cause the property to be included 
in his gross estate under section 2038. However, if the exercise were 
completely revoked, so that A died still possessed of the power, the 
property would not be included in A's gross estate for the reason that 
the power will not be treated as having been exercised.
    Example (4). A decedent exercised a general power of appointment 
created in 1940 by making a disposition in trust under which possession 
or enjoyment of the property subject to the exercise could be obtained 
only by surviving the decedent and under which the decedent retained a 
reversionary interest in the property of a value of more than five 
percent. The exercise will cause the property subject to the power to be 
included in the decedent's gross estate, since such a disposition if it 
were a transfer of property owned by the decedent would cause the 
property to be included in his gross estate under section 2037.

    (d) Release or lapse. A failure to exercise a general power of 
appointment created on or before October 21, 1942, or a complete release 
of such a power is not considered to be an exercise of a general power 
of appointment. The phrase ``a complete release'' means a release of all 
powers over all or a portion of the property subject to a power of 
appointment, as distinguished from the reduction of a power of 
appointment to a lesser power. Thus, if the decedent completely 
relinquished all powers over one-half of the property subject to a power 
of appointment, the power is completely released as to that one-half. If 
at or before the time a power of appointment is relinquished, the holder 
of the power exercises the power in such a manner or to such an extent 
that the relinquishment results in the reduction, enlargement, or shift 
in a beneficial interest in property, the relinquishment will be 
considered to be an exercise and not a release of the power. For 
example, assume that A created a trust in 1940 providing for payment on 
the income to B for life and, upon B's death, remainder to C.

[[Page 331]]

Assume further that B was given the unlimited power to amend the trust 
instrument during his lifetime. If B amended the trust in 1948 by 
providing that upon his death the remainder was to be paid to D, and if 
he further amended the trust in 1950 by deleting his power to amend the 
trust, such relinquishment will be considered an exercise and not a 
release of a general power of appointment. On the other hand, if the 
1948 amendment became ineffective before or at the time of the 1950 
amendment, or if B in 1948 merely amended the trust by changing the 
purely ministerial powers of the trustee, his relinquishment of the 
power in 1950 will be considered as a release of a power of appointment.
    (e) Partial release. If a general power of appointment created on or 
before October 21, 1942, is partially released so that it is not 
thereafter a general power of appointment, a subsequent exercise of the 
partially released power is not an exercise of a general power of 
appointment if the partial release occurs before whichever is the later 
of the following dates:
    (1) November 1, 1951, or
    (2) If the decedent was under a legal disability to release the 
power on October 21, 1942, the day after the expiration of 6 months 
following the termination of such legal disability.

However, if a general power created on or before October 21, 1942, is 
partially released on or after the later of these dates, a subsequent 
exercise of the power will cause the property subject to the power to be 
included in the holder's gross estate, if the exercise is such that if 
it were a disposition of property owned by the decedent it would cause 
the property to be included in his gross estate. The legal disability 
referred to in this paragraph is determined under local law and may 
include the disability of an insane person, a minor, or an unborn child. 
The fact that the type of general power of appointment possessed by the 
decedent actually was not generally releasable under the local law does 
not place the decedent under a legal disability within the meaning of 
this paragraph. In general, however, it is assumed that all general 
powers of appointment are releasable, unless the local law on the 
subject is to the contrary, and it is presumed that the method employed 
to release the power is effective, unless it is not in accordance with 
the local law relating specifically to releases or, in the absence of 
such local law, is not in accordance with the local law relating to 
similar transactions.
    (f) Partial exercise. If a general power of appointment created on 
or before October 21, 1942, is exercised only as to a portion of the 
property subject to the power, section 2041 is applicable only to the 
value of that portion. For example, if a decedent had a general power of 
appointment exercisable by will created on or before October 21, 1942, 
over a trust fund valued at $200,000 at the date of his death, and if 
the decedent exercised his power either to the extent of directing the 
distribution of one-half of the trust property to B or of directing the 
payment of $100,000 to B, the trust property would be includable in the 
decedent's gross estate only to the extent of $100,000.