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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