(a) Community Property Exclusion to Spouse--Transfer Coupled with Power of Appointment Made by Decedents Dying Prior to January 1, 1976.

With reference to decedents dying prior to January 1, 1976, where a power of appointment is given by a donor to the donor's spouse over any portion of the donor's half interest in community property the value of any interest given other than the power of appointment itself up to but not exceeding the value of a life estate to the spouse is excluded from taxation. Thus, the taxability of a transfer of a power of appointment in community property from one spouse to the other is reduced by the value of other interests but not to exceed the value of a life estate where other interests in the same property are given to the spouse which do not amount to a power of appointment. For example, if a surviving spouse receives a life estate in the decedent's half of their community property together with a power to appoint the remainder, the value of the life estate would be excluded from tax and the value of the remainder would be taxable. On the other hand, if the surviving spouse receives no specified life estate but is given a power to revoke during life with a testamentary power to appoint the remainder, none of the community property so covered would be excluded from tax because both the power to revoke and the testamentary power to appoint each come within the definition of a power of appointment and the power to revoke is not an interest other than a power of appointment. If, in this latter case the surviving spouse is also given a life estate in conjunction with the power to revoke, the value of the life estate is excluded from tax.

A life estate may be implied from the nature of the transfer. Thus, if a power of appointment in community property is given to a spouse by way of a power to consume during lifetime it is considered to include an implied life estate for this purpose and an exclusion is allowed for the value of a life estate to the spouse.

To qualify for this exclusion the interest given which is other than the power of appointment itself need not be in the nature of a life estate. Revenue and Taxation Code Section 13694 merely requires that it be any interest other than the power itself. For example, such additional interest may be in the form of an annuity of specified amounts or for periodic payments for a time certain or payment at a specified future time. In such cases the exclusion is limited to the value of a life estate or the value of the additional interest whichever is less.

For purposes of computing the life estate exclusion under this exception in Revenue and Taxation Code Section 13694, the valuation principles of Revenue and Taxation Code Sections 13953 and 13954 will apply.

These provisions and illustrations do not apply to joint trustee bank or savings and loan accounts between spouses which are treated as joint tenancy accounts under Revenue and Taxation Code Section 13671.

(b) Discretionary Power of Trustee to Make Certain Payments of Income or Principal.

For the purpose of treating the creation of a power of appointment as a transfer from the donor to the donee of the power certain discretionary powers granted to a trustee are not considered to be powers of appointment. These consist of powers limited to making discretionary payments of principal or income for the benefit of a trust beneficiary or beneficiaries other than the trustee. Trusts containing such powers are often termed “sprinkling” or “spraying” trusts and this exception to the treatment of these powers as powers of appointment is limited to those situations in which the trust instrument specifically provides that the trustee or trustees shall have discretionary power to make payments for the benefit of a trust beneficiary other than the trustee. Included are those sprinkling trust situations in which there is a limited and continuing discretion to determine from time to time during the existence of the trust to make unequal payments to one or more of the trust beneficiaries and the power to effect a payment of trust corpus by terminating the trust, in whole or in part.

Where this exception as to discretionary payments is met the tax is determined upon a transfer from the donor to the ultimate beneficiaries and is treated as a transfer subject to the contingent future identification of those beneficiaries within the provisions of Revenue and Taxation Code Section 13411. See also Revenue and Taxation Code Section 14191 whereby the contingencies can be settled upon a compromise at the time the tax is fixed.

Where the power to make discretionary payments of income or principal may be exercised in favor of the trustee, the trustee will be considered as having a general power of appointment; and where the trustee has the power to appoint the beneficiary (or beneficiaries) of the trust from among a designated class of beneficiaries, which does not include the trustee, his estate, his creditors, or creditors of his estate, the trustee will be considered as having a limited power of appointment.