However, if the child dies before the trust terminates at age 40 and the terms of the trust provide in such event that the deceased child’s children are to receive the trust assets, then the distribution of those assets to the deceased child’s children will constitute a taxable termination under I.R.C. Section 2612, and if the trust has not be exempted from the GST tax by the allocation of the client’s GST exemption (either because the client had allocated all his GST exemption to other trusts he created, or he did not have enough GST tax exemption available to allocate GST exemption to all of his trusts), then the taxable termination will result in the assessment of GST taxes which could consume a substantial portion of the assets in the trust. This result can be avoided, however, by giving a child a testamentary general power of appointment over the assets in the trust which would cause the trust to be includible in the deceased child’s estate under I.R.C. Section 2041 for estate tax purposes, therefore making the deceased child the transferor under I.R.C. Section 2652 (a) of the trust property for GST tax purposes. Since the deceased child is considered the transferor for GST tax purposes because of the child’s testamentary general power of appointment over the trust, the distribution of the trust assets to the deceased child’s children at the child’s death is not considered a generation-skipping transfer.

Although rare, this case illustrates one of the few exceptions in which an individual can lose the protection of the Florida homestead exemption despite no actual wrongdoing on their part.Tax Court Holds That Trustee/Beneficiary's Power to Invade Trust Principal for Her "Welfare" Is Limited by an Ascertainable Standard and Trust Principal Not Includible in Her Estate under IRC §2041(b)(1)(A) – Estate of Ann R. Chancellor, et al. v. Commissioner (TC Memo 2001-172 July 14, 2011) Frequently, trust agreements ensure that the principal invasion power held by a trustee who is also a beneficiary is limited to distributions for the beneficiary's "health, education, maintenance and support." This limitation ensures that the trust's assets are not included in the beneficiary's estate for estate tax purposes upon the beneficiary's death.

The trust agreement at issue gave the Primary Beneficiary a testamentary power of appointment over certain trust property, and the language read as follows: Any part, or all, of the then remaining principal of the Trust Estate, together with any accrued and undistributed income therefrom, shall be paid over, conveyed and distributed to [his or her] creditors or the creditors of [his or her] estate or such appointee or appointees among those of [the Primary Beneficiary’s] lineal descendants who are living at the death of [the Primary Beneficiary] in such manner and in such proportions as [he or she] may appoint in and by [his or her] Last Will and Testament, but subject to the terms and conditions hereinafter provided . . . . The trust agreement also granted certain powers to a non-beneficiary trustee of the trust, including the following powers: to create in a lineal descendant of the Grantor a testamentary general power of appointment within the meaning of IRC § 2041 [including the power the exercise of which requires the consent of the Trustee (other than any beneficiary)]; to limit a general power of appointment of a lineal descendant of the Grantor, as to all or part of such principal at any time prior to the death of such lineal descendant by narrowing the class to whom the powerholder may appoint the property subject to such appointment, so as to convert such power into a special power of appointment; and to eliminate such power for all or any part of such principal as to which such power was previously created. Because no non-beneficiary was serving as trustee of the trust, in connection with the request for a private letter ruling, it was necessary for the trust to be judicially modified to provide a method for appointing an independent special trustee who would have the authority to exercise the foregoing powers.

[v] If the surviving spouse is the sole trustee of the credit shelter trust, his or her ability to use trust principal for his or her benefit must be limited by an ascertainable standard relating to his or her health, education, support, or maintenance. See IRC §2041(b)(1)(A). Otherwise, the credit shelter trust’s assets will be included in the surviving spouse’s estate.