Holding a general lifetime power of appointment over trust property has what income tax consequence?

Holding a general lifetime power of appointment over trust property has what income tax consequence?

• A. The holder is treated as the owner of the trust for income tax purposes under IRC§678.
• B. The holder must include trust income in their gross income only if they exercise the power.
• C. The holder is taxed on the income from the withdrawal portion of the trust, whether or not the power is exercised.
• D. The holder has no income tax consequences because the power relates only to estate tax.

Answer: (A)

A general lifetime power of appointment over trust property makes the holder treated as the owner of the trust for income tax purposes. Under IRC section 678, the holder is taxed as if they own the trust, so the trust’s income is includable on the holder’s own tax return. This reflects the control the holder has to direct who ultimately receives the property, including themselves, which makes the tax liability sit with the holder rather than with the trust or simply waiting for exercise. This applies even if the power is not exercised, and it means trust income is reported by the holder in the year the income is earned.

A general lifetime power of appointment over trust property makes the holder treated as the owner of the trust for income tax purposes. Under IRC section 678, the holder is taxed as if they own the trust, so the trust’s income is includable on the holder’s own tax return. This reflects the control the holder has to direct who ultimately receives the property, including themselves, which makes the tax liability sit with the holder rather than with the trust or simply waiting for exercise. This applies even if the power is not exercised, and it means trust income is reported by the holder in the year the income is earned.