(a) In General.

Pursuant to Revenue and Taxation Code Section 13696 (effective as to decedents who died on or after September 17, 1965) if a donee has a general power of appointment over property at the time of his death the exercise or nonexercise thereof is treated as a transfer subject to inheritance tax. If there is an exercise the transfer is taxed to the person or persons to whom the property is appointed. If the power is not exercised the transfer is taxed to those to whom the property passes by virtue of the nonexercise, i.e., the takers in default. An exercise or release of the power before death is taxable to the extent indicated in Revenue and Taxation Code Section 13697 (see Section 13697). The exercise of the limited power of appointment is subject to tax at the death of a decedent only if the donor who created the power died prior to 5:00 p.m. of June 25, 1935, and the power was exercised thereafter (see Revenue and Taxation Code Section 13695). Similarly the exercise of a general power under such circumstances was subject to tax as to donees who died prior to September 17, 1965. All general powers held by a decedent who died on or after September 17, 1965 are subject to tax as indicated above. (See Section 13692.1 through 13692.6 for definitions of various terms used herein).

(b) Existence of Power at Death.

Under Revenue and Taxation Code Section 13696 a power of appointment is considered to exist on the date of a deceased donee's death even though the exercise of the power is subject to the precedent giving of notice, or even though the exercise of he power takes effect only on the expiration of a stated period after its exercise, whether or not on or before the decedent's death notice has been given or the power has been exercised. However, a power which by its terms is exercisable only upon the occurrence during the decedent's lifetime of an event or a contingency which did not in fact take place or occur during such time is not a power in existence on the date of the decedent's death. For example, if a decedent was given a general power of appointment exercisable only after he reached a certain age, only if he survived another person, or only if he died without descendants, the power would not be in existence on the date of the decedent's death if the condition precedent to its exercise had not occurred.

(c) Exercise or Nonexercise of Power of Appointment.

For purposes of Revenue and Taxation Code Section 13696 the exercise or nonexercise of a power of appointment held at death by a donee determines the person or persons against whom the inheritance tax is assessed. In the case of an exercise the tax is upon a transfer from the donee to the person or persons who are appointed to take the property. If the power is not exercised the tax determination is based on a transfer to the person or persons who take in default of the exercise of the power. The general law requirements regarding the exercise of a power of appointment must be met. These are contained in Chapter 4 (commencing with Section 1384.1) of Part 4, Division 2 of the Civil Code. For the effect of a failure to make an effective appointment see Chapter 5 (commencing with Section 1389.1) of Part 4, Division 2 of the Civil Code.

The term “exercise” means an act on the part of the donee of a power of appointment of designating the person or persons who are to receive the property subject to the power. A power of appointment is considered as exercised for purposes of Revenue and Taxation Code Section 13696 even though the exercise is in favor of the taker in default of appointment. A power of appointment is also considered as exercised even though the disposition cannot take effect until the occurrence of an event after the exercise takes place, if the exercise is irrevocable and, as of the time of the exercise, the condition was not impossible of occurrence. For example, if property is left in trust to A for life, with a power in B to appoint the remainder by will, and B dies before A, exercising his power by appointing the remainder to C if C survives A, B is considered to have exercised his power if C is living at B's death. On the other hand, a testamentary power of appointment is not considered as exercised if it is exercised subject to the occurrence during the decedent's life of an express or implied condition which did not in fact occur. Thus, if in the preceding example, C dies before B, B's power of appointment would not be considered to have been exercised. Similarly, if a trust provides for income to A for life, remainder as A appoints by will, and A appoints a life estate in the property to B and does not otherwise exercise his power, but B dies before A, A's power is not considered to have been exercised.

For purposes of Revenue and Taxation Code Section 13696 the mere right to exercise a general power of appointment existing in the donee of the power at his death is sufficient to establish a taxable transfer from the donee to the appointees of an exercise of the power or to the takers in default of an exercise. In the case of a default of exercise there need be no showing of an actual intention on the part of the donee to decline, refuse or otherwise specify that the power is not being exercised. Being an inheritance tax, the incidence of tax is upon the transfer of property interests to the ultimate beneficiaries occasioned by the donee's exercise or nonexercise of the power.

Note: Reference: Section 13696, Revenue and Taxation Code.