When a Connecticut resident exercises a testamentary power of appointment to create a new trust, is that appointive trust's residency set by the residency of the person who gave the power (the donor) or the person who exercised it (the donee)?

Plain-English summary

D, a Connecticut resident, was the income beneficiary of two testamentary trusts — one created under the will of F and one under the will of M, neither of whom died a Connecticut resident. Each trust gave D a testamentary power of appointment that was not a general power (as defined in 26 U.S.C. §§ 2041(b)(1) and 2514(c)). In her own will, D exercised each power, appointing the trust property into new trusts under her revocable inter vivos trust agreement. D then died a Connecticut resident. The question: are the resulting appointive trusts Connecticut resident or nonresident trusts?

DRS held the residency of an appointive trust created by exercising a non-general (special) power of appointment is set by the residency of the donor of the power — the person who created the power — not the donee who exercised it. (By contrast, if the power exercised is a general power of appointment, residency follows the donee.) The underlying principle, drawn from common-law property doctrine, is that property passing under a power of appointment belongs to the donor, and the appointee takes through the donor, with the donee acting as a "mere conduit or agent" of the donor (citing Naylor v. Brown, 166 Conn. 581 (1974), and 62 Am. Jur. 2d Powers of Appointment).

Because Connecticut's resident trust definition (Conn. Gen. Stat. § 12-701(a)(4)(C) and (D)) is modeled on New York's (N.Y. Tax Law § 605(b)(3)), DRS followed the New York construction — the legislative history of the New York statute (the "Greenberg Memorandum") and New York Advisory Opinion TSB-A-03(6)I (Nov. 21, 2003), the only reported decision on the issue. Under the rule that a state adopting another state's statute usually adopts that state's construction (SLI International Corp. v. Crystal, 236 Conn. 156 (1996)), DRS adopted the analysis in TSB-A-03(6)I.

Applying that rule to the facts: the trusts under F's and M's wills are nonresident trusts (F and M died nonresidents); D's own revocable inter vivos trust is a resident trust (D died a Connecticut resident); but the two appointive trusts D created by exercising her special powers are nonresident trusts — because the powers were not general, and the donors of the powers (F and M) each died nonresidents of Connecticut.

What this means for you

Trustees and fiduciaries of appointive trusts

When a trust is funded by someone exercising a power of appointment, don't assume the trust's income-tax residency follows the person who signed the exercise. For a special (non-general) power, look back to the donor who created the power: that person's residency (e.g., where they were domiciled at death for a testamentary trust) drives the appointive trust's Connecticut residency. Only a general power ties residency to the donee.

Estate planners and trust-and-estate attorneys

The type of power matters for state income taxation, not just for federal estate/gift tax. Granting or exercising a special power can keep an appointive trust a nonresident trust if the original donor was a nonresident — even though the person exercising the power is a Connecticut resident. Because Connecticut tracks New York here, New York guidance (including TSB-A-03(6)I) is persuasive authority for structuring.

Fiduciary accountants and tax professionals

Connecticut's resident-trust categories are in § 12-701(a)(4). For appointive trusts, the dispositive question is whether the exercised power is general (26 U.S.C. §§ 2041(b)(1), 2514(c); mirrored for Connecticut succession tax in § 12-345b). Special power → donor's residency controls; general power → donee's residency controls. Document the donor's domicile at the relevant time to support the residency position.

Common questions

Q: Does a Connecticut resident exercising a power of appointment make the new trust a Connecticut resident trust?
A: Not by itself. If the power is a special (non-general) power, the appointive trust's residency follows the donor of the power, not the resident donee who exercised it.

Q: What's the rule for a general power of appointment?
A: For a general power, the appointive trust's residency is determined by the residency of the donee who exercised it.

Q: Why did Connecticut rely on a New York advisory opinion?
A: Connecticut's resident-trust statute is modeled on New York's, and New York's TSB-A-03(6)I was the only reported decision addressing the issue, so DRS adopted its analysis under the rule that an adopting state usually follows the origin state's construction.

Q: Why were both appointive trusts here nonresident trusts?
A: D's powers were not general powers, so the donors of the powers controlled residency — and the donors (F and M) each died nonresidents of Connecticut.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-701(a)(4) (definition of "resident trust," including subparagraphs (C) (property transferred by will of a Connecticut-resident decedent) and (D) (property of a Connecticut-resident transferor))
• Conn. Gen. Stat. § 12-345b (Connecticut succession tax definition of a general power of appointment)
• 26 U.S.C. §§ 2041(b)(1) and 2514(c) (federal definition of a general power of appointment)
• N.Y. Tax Law § 605(b)(3)(B) and (C) (New York resident-trust definition on which the Connecticut statute is modeled)

Guidance relied on:

• New York Advisory Opinion TSB-A-03(6)I (Nov. 21, 2003) — adopted by DRS: a special power ties appointive-trust residency to the donor; a general power ties it to the donee
• Greenberg Memorandum (legislative history of N.Y. Tax Law § 605(b)(3))

Cases and authorities:

• Naylor v. Brown, 166 Conn. 581, 353 A.2d 709 (1974)
• SLI International Corp. v. Crystal, 236 Conn. 156, 671 A.2d 813 (1996)
• State v. Elliott, 177 Conn. 1, 411 A.2d 3 (1979)
• 62 Am. Jur. 2d Powers of Appointment and Alienation
• 2B Norman J. Singer, Statutes and Statutory Construction § 52:02 (6th ed. 2000)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2005-2

Original ruling text

Ruling 2005-2, Income Tax/Residency of Appointive Trust

FACTS:

D , a resident of Connecticut, was the income beneficiary under two testamentary trusts.  One of the trusts was established under F ’s will and the other trust was established under M ’s will.  Neither F nor M died a resident of Connecticut.  Under each of these testamentary trusts, D was provided with a testamentary power of appointment.  The power of appointment was not a general power of appointment, as defined in 26 U.S.C. §§2041(b)(1) and 2514(c).  D created a revocable trust by an inter vivos trust agreement.  D subsequently died a resident of Connecticut.

In D ’s will, D exercised her power of appointment over the trust established under F ’s will by appointing the property of the trust to a trust created under a provision of her revocable inter vivos trust agreement.  In D ’s will, D also exercised her power of appointment over the trust established under M ’s will by appointing the property of the trust to a trust created under another provision of her revocable inter vivos trust agreement.

ISSUES:

Is the residency status of an appointive trust created by the exercise of a power of appointment that is not a general power of appointment to be determined by the residency of the donor of the power of appointment or by the residency of the donee of the power of appointment?

RULING:

The residency status of an appointive trust created by the exercise of a power of appointment that is not a general power of appointment is to be determined by the residency of the donor of the power of appointment.  The residency status of an appointive trust created by the exercise of a general power of appointment is to be determined by the residency of the donee of the power of appointment.

DISCUSSION:

For Connecticut income tax purposes, a resident trust, as defined in Conn. Gen. Stat. §12-701(a)(4), is:

(C) a trust, or portion of a trust, consisting of property transferred by will of a decedent who at the time of his death was a resident of this state, and

(D) a trust, or a portion of a trust, consisting of the property of (i) a person who was a resident of this state at the time the property was transferred to the trust if the trust was then irrevocable, (ii) a person who, if the trust was revocable at the time the property was transferred to the trust, and has not subsequently become irrevocable, was a resident of this state at the time the property was transferred to the trust or (iii) a person who, if the trust was revocable when the property was transferred to the trust but the trust has subsequently become irrevocable, was a resident of this state at the time the trust became irrevocable. . . .

The only reported decision, judicial or administrative, that addresses the issue raised in this Ruling is a New York Advisory Opinion (TSB-A-03(6)I) issued by the New York Department of Taxation and Finance on November 21, 2003.  Because the Connecticut income tax statutes are modeled after the New York income tax statutes, the definition of “resident trust” in Conn. Gen. Stat. §12-701(a)(4)(C) and (D) is substantially similar to the definition in N.Y. Tax Law §605(b)(3)(B) and (C).

“When the legislature of a state adopts a statute which is identical or similar to one in effect in another state or county, the courts of the adopting state usually adopt the construction placed on the statute in the jurisdiction in which it originated.”  2B Norman J. Singer, Statutes and Statutory Construction §52:02 (6th ed. 2000) (hereinafter, “Singer, Statutes and Statutory Construction”).  “‘The fact that a statute is almost a literal copy of a statute of a sister state is persuasive evidence of a practical reenactment of the statute of the sister state; as such it is proper to resort to the decisions of a sister court construing that statutory language.’”  SLI International Corp. v. Crystal , 236 Conn. 156, 164-65, 671 A.2d 813 (1996) (quoting State v. Elliott , 177 Conn. 1, 5, 411 A.2d 3 (1979)).

“Legislative history of the adopted statute can also be considered relevant.”  Singer, Statutes and Statutory Construction §52.02.  For purposes of N.Y. Tax Law §605(b)(3), “[t]he residence of a trust created pursuant to a power of appointment by a fiduciary [is to be] determined by the domicile of the donor of the power.”  Memorandum of Sen. Samuel L. Greenberg [sponsor of S. 4410] to Rules Comm., S. 4410, Ch. 792 of the Laws of 1967, reprinted in 1967 N.Y. Legislative Annual, at 223 (hereinafter “Greenberg Memorandum”).

A power of appointment is “a power given by the donor of property to the donee, which enables the donee to designate the appointees or persons who are to take the property at some future time, or the shares which they are to receive.”  62 Am. Jur. 2d Powers of Appointment and Alienation §2.  “A power of appointment is not property or a property right, even though it concerns property.  Rather, it is a mere right or power, a personal privilege or authority.”  Id ., §7.   “Property that passes by a power of appointment belongs to the donor of the power and not to the donee, and the appointee of the power takes through a transfer from the donor rather than the donee, who, in exercising the power, acts as a mere conduit or agent of the donor.”  Id .  “[I]n common-law property concepts the appointee takes from the donor of the power of appointment rather than from the donee of the power . . . .”  Naylor v. Brown , 166 Conn. 581, 588, 353 A.2d 709 (1974).

“Powers are ordinarily categorized as either general or special.”  62 Am. Jur. 2d Powers of Appointment and Alienation §11.  For federal estate and gift tax purposes (and, because Internal Revenue Code provisions are incorporated, for Connecticut estate and gifts tax purposes), a general power of appointment is one that may be exercised wholly in favor of the donee of the power, his or her estate, his or her creditors or the creditors of his or her estate.  26 U.S.C. §§2041(b)(1) and 2514(c).  For Connecticut succession tax purposes, the term is defined in the same manner.  See Conn. Gen. Stat. §12-345b.

The legislative history of N.Y. Tax Law §605(b)(3) indicates that a person who transfers property held in trust to an appointive trust, by exercising a power of appointment that is not a general power of appointment over the trust property, is not to be considered the donor of the power for purposes of determining the residency of the appointive trust.  Example 7, Greenberg Memorandum, at 225.  The New York Department of Taxation and Finance has confirmed that this is its position in N.Y. Advisory Opinion TSB-A-03(6)I (November 21, 2003).  “[A] person who transfers property held in trust to an appointive trust by the exercise of a special power of appointment over the trust property is not considered the donor of the trust property for purposes of determining the residency of the appointive trust.  The donor of the special power of appointment is considered the donor of the trust property for purposes of determining the residency of the appointive trust.”  Id ., at 6.

On the other hand, there was no example in the Greenberg Memorandum addressing the residency of an appointive trust where the trustee exercised a general power of appointment.  N.Y. Advisory Opinion TSB-A-03(6)I takes the approach that “[a] person who transfers property held in trust to an appointive trust by exercise of a general power of appointment over the trust property is considered the donor of the trust property for purposes of determining the residency of the appointive trust.”  Id ., at 6.

The Department adopts the analysis in N.Y. Advisory Opinion TSB-A-03(6)I.

To summarize:

the trust created under F ’s will and of which D was the income beneficiary is a nonresident trust, because F died a nonresident of Connecticut;

the trust created under M ’s will and of which D was the income beneficiary is a nonresident trust, because M died a nonresident of Connecticut;

the revocable inter vivos trust created by D is a resident trust, because D died a resident of Connecticut;

the appointive trust created by D ’s exercise of a power of appointment over the property of F ’s testamentary trust is a nonresident trust because D ’s power of appointment is not a general power of appointment and the donor of the power, F , died a nonresident of Connecticut; and

the appointive trust created by D ’s exercise of a power of appointment over the property of M ’s testamentary trust is a nonresident trust because D ’s power of appointment is not a general power of appointment and the donor of the power, M , died a nonresident of Connecticut.

LEGAL DIVISION

January 14, 2005