Can a General Power of Appointment Get a Step-Up in Basis for Assets in an Irrevocable Trust?

The short answer: yes. Assets in an irrevocable trust that is outside the grantor’s estate do not receive a new basis when the grantor dies, a rule the Internal Revenue Service confirmed in Revenue Ruling 2023-2. But if someone else holds a general power of appointment over those assets when that person dies, Section 2041 of the Internal Revenue Code pulls the assets into that person’s gross estate, and Section 1014(b)(9) then gives them a basis equal to their value at that person’s death. The technique is to give the power to an older family member whose own estate is far below the estate tax exemption, so that inclusion costs nothing and the step-up is free. It is sound, it is used by careful planners, and it has a longer list of things to get wrong than the summary suggests: the powerholder’s state of residence, the powerholder’s creditors and Medicaid exposure, the formula that caps the power, and the wording that decides whether the power is “general” at all.

This article explains why trust assets ordinarily miss the step-up, how a general power of appointment fixes that, how the power is drafted and limited, and the risks in New Jersey, New York, and Connecticut. It updates and replaces an earlier version of this article.

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Why Don’t Trust Assets Get a Step-Up When the Grantor Dies?

Because the step-up follows estate inclusion, not death. Section 1014 gives a new basis to property “acquired from a decedent,” and Section 1014(b)(9) defines that to include property “acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate.” A trust that the grantor deliberately placed outside the estate, such as an intentionally defective grantor trust, a spousal lifetime access trust, or a qualified personal residence trust after its term, is not included, so the assets in it are not “acquired from a decedent” when the grantor dies.

Planners once argued that grantor trust status alone, meaning the grantor’s payment of the income tax under Sections 671 through 679, was enough to treat the assets as acquired from the grantor at death. Revenue Ruling 2023-2 closed that argument. In the ruling’s facts, a grantor funded an irrevocable trust and retained a power that made it a grantor trust for income tax but “does not cause the trust assets to be included in A’s gross estate.” The Service held that “the basis of Asset is not adjusted to its fair market value on the date of A’s death under § 1014 because Asset was not acquired or passed from a decedent as defined in § 1014(b).” A family that moved a 1 million dollar asset into such a trust twenty years ago, and now holds it at 5 million, has 4 million dollars of built-in gain that the grantor’s death does not erase. Our article on the step-up in basis explains what that gain costs.

The fix is to find a different decedent.

How Does a General Power of Appointment Produce a Step-Up?

Section 2041(a)(2) includes in a decedent’s gross estate “any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942.” Under Section 2041(b)(1), a general power is “a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate.” The holder does not have to own the property, benefit from it, or ever exercise the power. Holding it at death is enough, and Section 1014(b)(9) then applies to the included property.

The planning follows directly. The trust instrument authorizes an independent party, usually a trust protector, to grant a general power of appointment over trust assets to a named individual. The individual chosen is older than the grantor, has an estate well below the estate tax exemption, and is likely to die before the trust assets are sold, which is why practitioners call the technique “upstream” planning and why the typical powerholder is the grantor’s parent or an aunt or uncle. When the powerholder dies, the trust assets are included in their gross estate under Section 2041, no estate tax results because the powerholder’s total estate is under the exemption, and the trust’s basis in the assets becomes their date-of-death value under Section 1014(b)(9). The trust then continues for the grantor’s children, who can sell the assets with little or no gain.

Two features of Section 2041 make the technique reliable. First, the power is included whether it is a “power to appoint” in the conventional sense or merely a power to reach the property: Treasury Regulation 20.2041-1(c)(1) provides that “a power of appointment exercisable for the purpose of discharging a legal obligation of the decedent or for his pecuniary benefit is considered a power of appointment exercisable in favor of the decedent or his creditors.” Second, the holder’s ability to use the power is irrelevant. The Second Circuit held in Estate of Alperstein, as the Service itself has summarized it, that appointive property “is part of the donee’s gross estate even though the donee, by virtue of incompetency, was unable to make a valid will at any time after the power was granted,” and the Service’s own Revenue Ruling 75-350 takes the position that incapacity “is immaterial in view of the requirements of § 2041.” An elderly powerholder with dementia still holds the power.

How Is the Power Drafted?

The drafting decisions are what separate a working plan from an expensive one.

Testamentary, not lifetime. The power is ordinarily exercisable only by the powerholder’s will. A power the holder could exercise during life would let the holder take the assets, would expose them to the holder’s creditors immediately, and would count as the holder’s resource for Medicaid. A testamentary power avoids all three while still satisfying Section 2041, because Treasury Regulation 20.2041-3(b) confirms that a power “is considered to exist on the date of a decedent’s death” even if its exercise “takes effect only on the expiration of a stated period.”

The narrowest general power. Because Section 2041(b)(1) requires only that the power be exercisable in favor of one of four classes, the power can be limited to appointment “to the creditors of the powerholder’s estate.” That is enough to make it general, and it gives the powerholder nothing during life and their family nothing at death unless the estate has creditors. The remainder passes as the trust directs if the power is not exercised, which it almost never is.

Avoid the ascertainable standard trap. Section 2041(b)(1)(A) excludes from the definition “a power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent.” A power drafted to look modest by tying it to the holder’s support is not a general power and produces no inclusion. The regulation adds that a power for the holder’s “comfort, welfare, or happiness” is not so limited, and is general.

The formula cap. The power should extend only to the portion of the trust whose inclusion will not produce estate tax in the powerholder’s estate. The formula must account for the federal exemption, which is 15,000,000 dollars for 2026 under Section 2010(c)(3) as amended in July 2025, and for the state estate tax where the powerholder lives, discussed below, and it should also reach only assets with built-in gain, since Section 1014 steps basis down as readily as up. A formula that references the exemption “in effect at the powerholder’s death” adjusts itself.

Who grants it, and when. The trust should give an independent trust protector, not the grantor and not a beneficiary, the power to grant, modify, and revoke the general power. Granting it late, when the powerholder is already ill, is permitted; the power need only exist at death. Revoking it if the powerholder’s circumstances change, for example because the powerholder inherits money or needs nursing home care, is the safety valve.

Watch the lapse rules. If a lifetime power is used and lapses, Sections 2041(b)(2) and 2514(e) treat the lapse as a release, and therefore a transfer by the powerholder, except to the extent of “the greater of $5,000 or 5 percent” of the property each year. Testamentary powers do not lapse during life and avoid the issue.

What Does the Powerholder’s State Add?

The federal exemption is high enough that federal estate tax is rarely the constraint. State law is.

New York. New York’s estate tax starts from the federal gross estate: under Tax Law 954(a), “the New York gross estate of a deceased resident means his or her federal gross estate as defined in the internal revenue code,” and the section expressly incorporates Section 2041. A New York powerholder therefore includes the appointive property for New York purposes as well. The basic exclusion amount for deaths in 2026 is 7,350,000 dollars, and under Tax Law 952(c) “no credit shall be allowed to the estate of any decedent whose New York taxable estate exceeds one hundred five percent of the basic exclusion amount,” the cliff that taxes the entire estate once it is more than 5 percent over the line. A formula that caps the power at the federal exemption would, for a New York powerholder, expose the entire estate to New York estate tax at graduated rates that reach 16 percent. The formula must cap the power at the New York figure, less the powerholder’s own assets, less the three-year gift add-back under Tax Law 954(a)(3), and with a margin below the cliff.

Connecticut. Connecticut’s estate tax also begins with the federal gross estate; General Statutes 12-391(c)(3) defines “gross estate” as “the gross estate, for federal estate tax purposes.” For deaths in 2023 and later, the tax under section 12-391(g) is “12% of the excess over the federal basic exclusion amount,” which for 2026 is 15,000,000 dollars, so a Connecticut powerholder has the same room as a federal one. Connecticut also has a gift tax under section 12-640, which matters only if the power is exercised or released during life.

New Jersey. New Jersey has had no estate tax for deaths on or after January 1, 2018, but its inheritance tax expressly reaches “property transferred pursuant to a power of appointment” under N.J.S.A. 54:34-1(d). The regulation at N.J.A.C. 18:26-5.12(b) then provides that “property that is transferred pursuant to a power of appointment is deemed to pass from the estate of the donor or creator of the power to the transferee,” which suggests that the relationship that matters for the tax class is the recipient’s relationship to the grantor of the trust, not to the powerholder. Whether those provisions, written with testamentary powers over a decedent’s own estate in mind, apply to a general power granted over an inter vivos trust, and whether an exercise or non-exercise in favor of the grantor’s children can produce a Class D result at 15 to 16 percent, is a question the statute and regulation do not answer directly, and it must be analyzed before any New Jersey powerholder is named. Our article on New Jersey’s inheritance tax describes the classes.

The powerholder’s state is the one that counts, not the grantor’s. A New Jersey grantor who names a parent living in Florida faces none of these state issues; one who names a parent living in Manhattan faces New York’s.

What Can Go Wrong?

The powerholder’s creditors. A general power exposes the property to the holder’s creditors to the extent state law allows. New York’s EPTL 10-7.2 provides that property covered by a general power “which is presently exercisable” is “subject to the payment of the claims of creditors of the donee,” whether or not the donee exercises it, but EPTL 10-7.4 provides that property subject to a general power “not presently exercisable” is reachable “only” if the donee created the power for himself or a postponed power becomes exercisable, “except in the case of a testamentary general power.” A testamentary power over a New York powerholder is therefore protected. New Jersey and Connecticut have no comparable statute, and Connecticut’s trust code treats lifetime withdrawal powers above the five-and-five amount as reachable. The testamentary form is the protection.

The powerholder’s Medicaid. The typical upstream powerholder is exactly the person who may need long-term care. A presently exercisable general power would make the trust assets the holder’s countable resource under rules like N.J.A.C. 10:71-4.1(c), which treats property as available when “the person has the right, authority or power to liquidate” it. A testamentary power gives the holder nothing during life and does not. The trust protector’s power to revoke the general power is the further safeguard if the holder applies for benefits.

Estate tax recovery. If the formula fails and the powerholder’s estate owes tax, Section 2207 entitles the powerholder’s executor “to recover from the person receiving such property” the portion of the tax attributable to it. The trust bears the cost, which is fair, but the grantor’s family should understand that a mistake in the formula lands on them.

Property passing back to the grantor. Section 1014(e) denies the step-up where “appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death” and the property “passes from the decedent to the donor of such property.” A trust whose remainder returns to the grantor after the powerholder’s death, within a year of the grant, invites the argument. The trust should continue for the grantor’s descendants, not revert.

Exercise against the family. A powerholder who actually exercises the power in favor of estate creditors, or whose will is drafted by someone else with a general residuary exercise, can divert the assets. Limiting the power to estate creditors, and confirming that the powerholder’s will does not blanket-exercise powers of appointment, contains the risk. New Jersey’s N.J.S.A. 3B:3-45 provides that “a general residuary clause in a will or a will making general disposition of all of the testator’s property, does not exercise a power of appointment held by the testator unless specific reference is made to the power,” and other states have similar rules.

A step-down. Inclusion resets basis to date-of-death value in both directions. The formula should exclude assets with losses, or the protector should revoke the power over them.

Unaddressed alternatives. For a trust with a beneficiary who already holds a limited power of appointment, the “Delaware tax trap” of Section 2041(a)(3), which causes inclusion when a power is exercised “by creating another power of appointment” that postpones vesting beyond the original perpetuities period, can achieve inclusion in the beneficiary’s estate without an upstream relative. It is a specialized tool and depends on state perpetuities law.

When Does This Planning Make Sense?

When an existing irrevocable trust holds assets with substantial built-in gain, when the family expects to sell those assets within a generation, and when there is a relative with a large unused exemption who is willing to hold a power that gives them nothing. It makes the most sense for trusts funded years ago with founder stock, real estate, or a family business whose value has grown well beyond its basis. It makes little sense for a trust holding cash or recently purchased securities, or where every candidate powerholder lives in New York with an estate near the cliff, or where the only candidate is on Medicaid.

The same idea can be built into new trusts from the start, by giving the trust protector the power to grant a general power in the future, so that the option exists when a suitable powerholder and a suitable asset appear. Our article on directed trusts and trust protectors explains who that person should be.

Plan Well. Live Better.

The estate tax exemption has grown faster than most families’ estates, and the income tax on built-in gain is now the larger cost for many irrevocable trusts. At Milvidskiy Law Group, we review existing trusts for basis exposure, draft the trust protector and formula provisions that make a general power of appointment safe, and analyze the powerholder’s own state tax, creditor, and Medicaid position before any power is granted. Learn more about our estate planning services.

This article is for general informational purposes only and does not constitute legal or tax advice. Reading it does not create an attorney-client relationship. The technique described depends on the terms of the trust, the powerholder’s residence and circumstances, and federal and state law that changes; the New Jersey inheritance tax treatment of a power granted over an inter vivos trust is unsettled. The Internal Revenue Code sections, Treasury Regulations, Revenue Ruling 2023-2, and the New York, Connecticut, and New Jersey statutes and regulations described were verified in September 2026 and should be confirmed with tax counsel before acting.