A PRACTICAL LOOK AT SPRINGING THE DELAWARE TAX TRAP TO AVERT GENERATION SKIPPING TRANSFER TAX

I. INTRODUCTION

A paradigmatic use of the strategy that is the subject of this Article involves a separate trust for the benefit of one of "Settlor's" children, "Child." The trust instrument provides that on Child's death, the trust's assets are distributed as Child appoints by will. Child's

power of appointment ("Power") is a "special power": it can be exercised only in favor of persons other than Child, Child's creditors, Child's estate, or the creditors of Child's estate.' The instrument provides that in default of appointment, the assets are divided into separate trusts for Child's descendants or, if none, for Settlor's descendants. Settlor's entire GST exemption2 is allocated elsewhere. Because Child's Power is a special power, it will not cause Child's gross estate to include the trust's assets.3 For that reason, Child's death is likely to be a "taxable termination" for purposes of the generation skipping transfer ("GST") tax.4 Because Settlor's GST exemption was allocated elsewhere, a taxable termination will subject the entire trust to a flat tax at the highest marginal estate tax rate.5