When a trust beneficiary uses a power of appointment to create a new appointive trust, whose domicile decides whether that new trust is a New York resident trust?

Plain-English summary

Milbank, Tweed, Hadley & McCloy, LLP asked the Department to resolve a recurring trusts-and-estates question: when a trust beneficiary holds a power of appointment and exercises it to move the trust's property into a brand-new "appointive" trust, whose domicile decides whether that new trust is a New York resident trust - and therefore subject to New York personal income tax - versus a nonresident trust? Petitioner presented six paired hypotheticals: in each pair, an original grantor (A) domiciled either in or outside New York created an irrevocable trust (T1) for a beneficiary (B) with the opposite domicile, B was given a power of appointment over T1's assets, and B exercised that power in 2001 to move the assets into a second trust (T2) for B's daughter (C). The pairs varied whether B's power was general (exercisable in favor of anyone, including B) or special (limited to B's descendants), and whether it was presently exercisable or exercisable only by will.

Under Tax Law § 605(b)(3), a trust is a resident trust if its property was transferred by a person domiciled in New York at the time of the transfer (or when the trust became irrevocable); under § 605(b)(4), it is a nonresident trust otherwise. The question was who counts as the "transferor" of T2's property - the original grantor A, or the donee B who actually exercised the power to fund T2.

Drawing on property-law concepts reflected in EPTL §§ 10-3.1 through 10-3.3 and IRC § 2041, the Department explained that a general power of appointment - exercisable in favor of the donee, the donee's estate, or the donee's creditors - is treated as tantamount to outright ownership by the donee, while a special power functions more like an agency, with the donee acting on behalf of the original property owner. The Department held that this same distinction controls appointive-trust residency: when a donee exercises a general power of appointment, the donee is considered the transferor of the property to the appointive trust, so the donee's own domicile (at the time of appointment, or at death for a testamentary power) determines whether the new trust is a resident or nonresident trust. When the donee exercises only a special power, the original donor who funded the first trust remains the transferor, so the original donor's domicile controls instead - regardless of the donee's domicile.

Applying that rule to the six situations: in Situations 1 and 2, B held only a special power (limited to appointing among B's descendants), so T2's residency followed A's domicile - resident in Situation 1 (A was a New York domiciliary) and nonresident in Situation 2 (A was not). In Situations 3 through 6, B held a general power (exercisable in favor of anyone, including B, whether presently exercisable or exercisable only by will), so T2's residency instead followed B's own domicile at the relevant time - nonresident in Situations 3 and 5 (B was not a New York domiciliary) and resident in Situations 4 and 6 (B was a New York domiciliary).

What this means for you

Trustees and beneficiaries considering an appointment or decanting

Before a beneficiary with a power of appointment moves trust assets into a new trust, classify the power under EPTL § 10-3.2: is it general (exercisable in favor of the donee, the donee's estate, or creditors) or special (limited to other beneficiaries)? That classification - not simply whose signature is on the appointment - determines whose domicile controls the new trust's New York residency and tax exposure. A general power shifts the residency analysis onto the donee; a special power leaves it with the original grantor.

Estate planning and tax professionals

The opinion also flags Tax Law § 605(b)(3)(D), a separate safe harbor: even a trust that is a "resident trust" under § 605(b)(3) is exempt from New York tax if all trustees are domiciled outside New York, the entire corpus (including intangibles, if no trustee is New York-domiciled) is located outside New York, and all income and gains derive from non-New York sources. That provision is independent of the transferor analysis in this opinion and should be checked separately for any appointive trust.

Common questions

Q: How do you tell a general power of appointment from a special one?
A: Under EPTL § 10-3.2, a power is general to the extent it is exercisable in favor of the donee, the donee's estate, the donee's creditors, or the creditors of the donee's estate. All other powers are special. In this opinion, powers limited to appointing among the donee's descendants were special; powers exercisable in favor of "any individual, including herself" were general.

Q: If the donee exercises a general power, does that make the donee the "grantor" of the new trust for all purposes?
A: For purposes of determining the appointive trust's residency under Tax Law § 605(b)(3)/(4), yes - the donee is treated as the transferor of the property. The opinion reasoned this from the estate and gift tax treatment of general powers (IRC § 2041) as tantamount to outright ownership.

Q: Does it matter whether the power is presently exercisable or exercisable only by will?
A: Not for the residency outcome in this opinion. Situations 3/4 (presently exercisable general powers) and Situations 5/6 (testamentary general powers exercisable only by will) reached the same result: the appointive trust's residency followed the donee's domicile at the time of exercise (or, for a testamentary power, at the donee's death).

Q: Does the domicile of the trustee matter to this analysis?
A: Not for classifying the transferor. The Trustee of both T1 and T2 was a New York-domiciliary bank in all six situations, yet the appointive trust's residency still turned on the domicile of whichever person (A or B) was the operative transferor - not the trustee's domicile. Trustee domicile is instead relevant to the separate safe harbor in Tax Law § 605(b)(3)(D).

Q: Can an appointive trust avoid New York tax even if it is a "resident trust"?
A: Yes, if it satisfies all three conditions of Tax Law § 605(b)(3)(D)/20 NYCRR 105.23(c): all trustees domiciled outside New York, entire corpus located outside New York, and all income and gains derived from non-New York sources.

Citations and references

• Tax Law § 605(b)(3) - defines a resident estate or trust based on the domicile of the person who transferred the property (or under whom the trust became irrevocable)
• Tax Law § 605(b)(4) - defines a nonresident estate or trust as one that is not resident
• Tax Law § 605(b)(3)(D) - exempts a resident trust from tax if all trustees are domiciled outside New York, the entire corpus is located outside New York, and all income/gains derive from non-New York sources
• 20 NYCRR 105.20(d)(1) - defines domicile as the place an individual intends as a permanent home
• 20 NYCRR 105.23(c) - restates the conditions under which a resident trust is not subject to New York tax
• EPTL § 10-3.1(a) - defines a power of appointment
• EPTL § 10-3.2 - distinguishes general powers (exercisable in favor of the donee, the donee's estate, or creditors) from special powers
• EPTL § 10-3.3 - distinguishes presently exercisable, testamentary, and postponed powers
• IRC § 2041(a) - includes property subject to a general power of appointment in the donee's gross estate
• IRC § 2041(b)(1) - defines "general power of appointment" for federal estate tax purposes

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a03_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(6)I
Income Tax
November 21, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I020830A

On August 30, 2002, a Petition for Advisory Opinion was received from Milbank, Tweed,
Hadley & McCloy, LLP, c/o Georgiana J. Slade, Esq., One Chase Manhattan Plaza, New York,
New York 10005.
The issue raised by Petitioner, Milbank, Tweed, Hadley & McCloy, LLP, is whether the
donee of a power of appointment over property held in trust who appoints property in trust is the
transferor to the appointive trust for purposes of section 605(b)(3) of the Tax Law and section
105.23 of the Personal Income Tax Regulations (Regulations).
Petitioner submits the following six hypothetical situations for appointive trusts created by
the exercise of a power of appointment as the basis for this Advisory Opinion.
Situation 1
In 1995, A, a New York domiciliary, establishes an irrevocable trust, T1, for the benefit of
A’s daughter, B, a non-New York domiciliary. A is the sole transferor of assets to the trust. Under
the terms of the trust, B is permitted to appoint the assets of the trust in further trust for the benefit
of one or more of B’s descendants. This power is both presently exercisable and exercisable by
Will. In 2001, B (while still a non-New York domiciliary) irrevocably appoints the assets of the trust
to be held in further trust, T2, for benefit of C, who is B’s daughter. The Trustee of both T1 and T2
is a New York domiciliary bank.
Situation 2
In 1995, A, a non-New York domiciliary, establishes an irrevocable trust, T1 for the benefit
of A’s daughter, B, a New York domiciliary. A is the sole transferor of assets to the trust. Under
the terms of the trust, B is permitted to appoint the assets of the trust in further trust for the benefit
of one or more of B’s descendants. This power is both presently exercisable and exercisable by
Will. In 2001, B (while still a New York domiciliary) irrevocably appoints the assets of the trust to
be held in further trust, T2, for benefit of C, who is B’s daughter. The Trustee of both T1 and T2 is
a New York domiciliary bank.
Situation 3
In 1995, A, a New York domiciliary, establishes an irrevocable trust, T1, for the benefit of
A’s daughter, B, a non-New York domiciliary. A is the sole transferor of assets to the trust. Under
the terms of the trust, B is permitted to appoint the assets of the trust (outright or in trust) for the
benefit of any individual, including herself. This power is presently exercisable. In 2001, B (while
still a non-New York domiciliary) irrevocably appoints the assets of the trust to be held in further

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trust, T2, for benefit of C, who is B’s daughter. The Trustee of both T1 and T2 is a New York
domiciliary bank.
Situation 4
In 1995, A, a non-New York domiciliary, establishes an irrevocable trust, T1, for the benefit
of A’s daughter, B, a New York domiciliary. A is the sole transferor of assets to the trust. Under
the terms of the trust, B is permitted to appoint the assets of the trust (outright or in trust) for the
benefit of any individual, including herself. This power is presently exercisable. In 2001, B (while
still a New York domiciliary) irrevocably appoints the assets of the trust to be held in further trust,
T2, for benefit of C, who is B’s daughter. The Trustee of both T1 and T2 is a New York domiciliary
bank.
Situation 5
In 1995, A, a New York domiciliary, establishes an irrevocable trust, T1, for the benefit of
A’s daughter, B, a non-New York domiciliary. A is the sole transferor of assets to the trust. Under
the terms of the trust, B is permitted to appoint the assets of the trust (outright or in trust) for the
benefit of any individual, including herself. This power is exercisable by Will only. In 2001, B dies
while still a non-New York domiciliary. In her Will (duly admitted to probate), B irrevocably
appointed the assets of the trust to be held in further trust, T2, for benefit of C, who is B’s daughter.
The Trustee of both T1 and T2 is a New York domiciliary bank.
Situation 6
In 1995, A, a non-New York domiciliary, establishes an irrevocable trust, T1, for the benefit
of A’s daughter, B, a New York domiciliary. A is the sole transferor of assets to the trust. Under
the terms of the trust, B is permitted to appoint the assets of the trust (outright or in trust) for the
benefit of any individual, including herself. This power is exercisable by Will only. In 2001, B dies
while still a New York domiciliary. In her Will (duly admitted to probate) B irrevocably appoints
the assets of the trust to be held in further trust, T2, for benefit of C, who is B’s daughter. The
Trustee of both T1 and T2 is a New York domiciliary bank.
Applicable law and regulations
Section 605(b)(3) of the Tax Law defines a resident estate or trust, and provides, in part:
Resident estate or trust. A resident estate or trust means:
(A) the estate of a decedent who at his death was domiciled in this state,
(B) a trust, or a portion of a trust, consisting of property transferred by will of a
decedent who at his death was domiciled in this state, or

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(C) a trust, or portion of a trust, consisting of the property of:
(i) a person domiciled in this state at the time such property was transferred
to the trust, if such trust or portion of a trust was then irrevocable, or if it was then
revocable and has not subsequently become irrevocable; or
(ii) a person domiciled in this state at the time such trust, or portion of a trust,
became irrevocable, if it was revocable when such property was transferred to the
trust but has subsequently become irrevocable.
For the purposes of the foregoing, a trust or portion of a trust is revocable if it is
subject to a power, exercisable immediately or at any future time, to revest title in the person
whose property constitutes such trust or portion of a trust, and a trust or portion of a trust
becomes irrevocable when the possibility that such power may be exercised has been
terminated.
Section 605(b)(3)(D) of the Tax Law, as added by Chapter 658 of the Laws of 2003,
applicable to tax years beginning on or after January 1, 1996, provides as follows:
(i) Provided, however, a resident trust is not subject to tax under this article if all of
the following conditions are satisfied:
(I) all the trustees are domiciled in a state other than New York;
(II) the entire corpus of the trusts, including real and tangible property, is
located outside the state of New York; and
(III) all income and gains of the trust are derived from or connected with
sources outside of the state of New York, determined as if the trust were a
non-resident trust.
(ii) For purposes of item (II) of clause (i) of this subparagraph, intangible property
shall be located in this state if one or more of the trustees are domiciled in the state of
New York.
(iii) Provided further, that for the purposes of item (I) of clause (i) of this
subparagraph, a trustee which is a banking corporation as defined in subsection (a) of section
fourteen hundred fifty-two of this chapter and which is domiciled outside the state of
New York at the time it becomes a trustee of the trust shall be deemed to continue to be a
trustee domiciled outside the state of New York notwithstanding that it thereafter otherwise
becomes a trustee domiciled in the state of New York by virtue of being acquired by, or
becoming an office or branch of, a corporate trustee domiciled within the state of New York.
Section 605(b)(4) of the Tax Law defines a nonresident estate or trust, and provides:

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Nonresident estate or trust.
(A) A nonresident estate means an estate which is not a resident.
(B) A nonresident trust means a trust which is not a resident or part-year resident.
Section 105.20(d)(1) of the Regulations provides:
Domicile, in general, is the place which an individual intends to be such individual’s
permanent home - the place to which such individual intends to return whenever such
individual may be absent.
Section 105.23(c) of the Regulations provides:
The determination of whether a trust is a resident trust is not dependent on the
location of the trustee or the corpus of the trust or the source of income; provided, however,
no New York State personal income tax may be imposed on such trust if all of the following
conditions are met:
(1) all the trustees are domiciled in a state other than New York State;
(2) the entire corpus of the trust, including real and tangible property is
located outside of New York State; and
(3) all income and gains of the trust are derived or connected from sources
outside of New York State, determined as if the trust were a nonresident.
Section 10-3.1(a) of the Estates, Powers and Trusts Law (EPTL) provides:
This article applies to powers of appointment. A power of appointment, as the term
is used in this article, is an authority created or reserved by a person having property subject
to his disposition, enabling the donee to designate, within such limits as may be prescribed
by the donor, the appointees of the property or the shares or the manner in which such
property shall be received.
Section 10-3.2 of the EPTL provides:
(a) A power of appointment is:
(1) general or special.
(2) exclusive or non-exclusive.

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(b) A power of appointment is general to the extent that it is exercisable wholly in
favor of the donee, his estate, his creditors or the creditors of his estate.
(c) All other powers of appointment are special.
(d) A special power of appointment is exclusive if it may be exercised in favor of one
or more of the appointees to the exclusion of the others.
(e) A special power of appointment is non-exclusive if it must be exercised in favor
of all the appointees.
Section 10-3.3 of the EPTL provides:
(a) A power of appointment, as to the time of its exercise, is either presently
exercisable, testamentary or postponed.
(b) A power of appointment is presently exercisable if it may be exercised by the
donee, during his lifetime or by his written will, at any time after its creation, and does not
include a postponed power as described in paragraph (d).
(c) A power of appointment is testamentary if it is exercisable only by a written will
of the donee.
(d) A power of appointment is postponed if it is exercisable by the donee only after
the expiration of a stated time or after the occurrence or non-occurrence of a specified event.
Internal Revenue Code (IRC) section 2041(a) contains the rules for powers of appointment
with respect to determining the gross estate for federal estate tax purposes, and provides, in part:
The value of the gross estate shall include the value of all property.
(1) Powers of appointment created on or before October 21, 1942. To the extent of
any property with respect to which a general power of appointment created on or before
October 21, 1942, is exercised by the decedent....
*

*

*

(2) Powers created after October 21, 1942. To the extent of any property with respect
to which the decedent has at the time of his death a general power of appointment created
after October 21, 1942, or with respect to which the decedent has at any time exercised or
released such a power of appointment by a disposition which is of such nature that if it were
a transfer of property owned by the decedent, such property would be includible in the
decedent’s gross estate under sections 2035 to 2038, inclusive....

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IRC section 2041(b)(1) contains the definition of a general power of appointment for federal
estate tax purposes, and provides, in part:
The term “general power of appointment” means a power which is excercisable in
favor of the decedent, his estate, his creditors, or the creditors of his estate; except that
(A) A power to consume, invade, or appropriate property for the benefit of
the decedent which is limited by an ascertainable standard relating to the health,
education, support, or maintenance of the decedent shall not be deemed a general
power of appointment.
Opinion
A power of appointment is a hybrid between agency relationship and ownership. A general
power of appointment is one that can be exercised wholly in favor of the donee of the power, his or
her estate, creditors or the creditors of the estate. If a person has a presently exercisable general
power of appointment, the property is treated for purposes of gift and estate taxation, determining
validity under the rule against perpetuities, and determining whether a creditor can reach the assets
subject to the power, as though the holder of the power owned it outright. If the holder of a power
cannot exercise it in favor of himself or herself, his or her estate, creditors or the creditors of the
estate, the power is special. A special power of appointment is more like an agency; the holder of
the power exercises it on behalf of the property owner. See 17B McKinney's Consolidated Laws
of New York, Practice Commentaries on EPTL sections 10-3.1 and 10-3.2.
All property in which a person has an interest at the time of death is includible in the gross
estate for federal estate tax purposes to the extent of his or her interest in the property. IRC section
2041 provides that a decedent’s gross estate includes the value of property over which the decedent
possessed a general power of appointment. For purposes of IRC section 2041, the term general
power of appointment means a power which is exercisable in favor of the decedent, his or her estate,
creditors, or creditors of the estate. This includes a power of appointment which is either presently
exercisable or testamentary.
For purposes of section 605(b)(3), (4) of the Tax Law, the residency of an appointive trust
created by the exercise of a power of appointment is determined based on the domicile of the donor
of the property who transferred the property to the trust. See Senate Rules Committee memo S.
4410 (1967) L 1967, ch. 792, 1967 NY Legis Ann, at 222. A person who transfers property held
in trust to an appointive trust by the 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. Conversely, 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.

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In situations 1 and 2, B, the donee of a presently exercisable power of appointment and
testamentary power of appointment over the property of T1, was only permitted to appoint the assets
of the trust in further trust for the benefit of B’s decedents. Therefore, B possessed a special power
of appointment. In situation 1, B, while a nonresident of New York State, appointed the assets of
T1 in further trust, T2. In situation 2, B, while a resident of New York State, appointed the assets
of T1 in further trust, T2. Since B possessed a special power of appointment, A, the donor of the
power, is considered the donor of the property transferred to T2. Therefore, the appointive trust, T2,
created in situation 1 is a resident trust pursuant to section 605(b)(3) of the Tax Law, since the donor
of the property, A, was a New York domiciliary. The appointive trust, T2, created in situation 2 is
a nonresident trust pursuant to section 605(b)(4) of the Tax Law, since the donor of the property,
A, was a non-New York domiciliary.
In situations 3 and 4, B, the donee of a presently exercisable power of appointment over the
property of T1, was permitted to appoint the assets of the trust for the benefit of any individual,
including herself. Therefore, B, possessed a general power of appointment. In situation 3, B, while
a nonresident of New York State, appointed the assets of T1 in further trust, T2. In situation 4, B,
while a resident of New York State, appointed the assets of T1 in further trust, T2. Since B
possessed a general power of appointment, B is considered the donor of the property transferred to
T2. Therefore, the appointive trust, T2, created in situation 3 is a nonresident trust pursuant to
section 605(b)(4) of the Tax Law, because B was a nonresident domiciliary. The appointive trust,
T2, created in situation 4 is a resident trust pursuant to section 605(b)(3) of the Tax Law, because
B was a resident domiciliary.
In situations 5 and 6, B, the donee of a testamentary power of appointment which is
exercisable only by will was permitted to appoint the assets of the trust for the benefit of any
individual, including herself. Therefore, B, possessed a general power of appointment. In situation
5, B dies while a nonresident of New York State. By will, B appointed the assets of T1 in further
trust, T2. In situation 6, B, dies while a resident of New York State. By will, B appointed the assets
of T1 in further trust, T2. Since B possessed a general power of appointment, B is considered the
donor of the property transferred to T2. Therefore, the appointive trust, T2, created in situation 5 is
a nonresident trust pursuant to section 605(b)(4) of the Tax Law, because B was a nonresident
domiciliary. The appointive trust, T2, created in situation 6 is a resident trust pursuant to section
605(b)(3) of the Tax Law, because B was a resident domiciliary.

DATED: November 21, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.