Which of the following is TRUE of the taxation of an individual holding a testamentary general power of appointment?

• A. She will be taxed on a percentage of the income only if the power is exercised.
• B. She will be taxed on a fraction or percentage of both the ordinary income and capital gains for the period of time the power is available but not exercised.
• C. She will not be taxed on income as a result of the power, but the full value of the property subject to the power will be included in her estate.
• D. She will be taxed on a fraction or percentage of both the ordinary income and capital gains for the period of time the power is available only if exercised.

Answer: (C)

This question hinges on how a testamentary general power of appointment is taxed. A general power of appointment lets the holder decide who will receive the property, including the holder herself or her estate. Because it’s a general power, the property subject to the power is included in the holder’s gross estate for estate tax purposes, regardless of whether the power is ever exercised. The holder does not incur current income tax simply from possessing the power; income from the property isn’t taxed to the power holder merely by having the power. Tax on income would occur only if the holder actually receives or is entitled to income from the property. So the correct statement is that she will not be taxed on income as a result of the power, but the full value of the property subject to the power will be included in her estate.