## Facts

- In 1961, Marian B. Farrel created an irrevocable inter vivos trust funded with securities for the benefit of her grandchildren and their issue, and she and her husband reported the transfer as a gift and paid federal gift tax.
- The trust was governed by Connecticut law and required that there be two trustees at all times.
- The trustees were granted broad discretionary authority to pay or apply all or part of the trust’s net income and principal to or for the benefit of one or more beneficiaries (and their issue).
- The trust contained no provision allowing any distribution of income or principal to Farrel under any circumstances.
- Farrel retained only one power: if a trustee position became vacant due to death, resignation, or removal by a proper court for cause, Farrel could appoint a successor trustee.
- The trust instrument did not expressly state whether Farrel could appoint herself as successor trustee, but neither the instrument nor Connecticut law barred her from doing so.
- Farrel did not have the power to remove a trustee to create a vacancy.
- During Farrel’s lifetime, trustee vacancies occurred twice (one trustee died in 1964; a successor later resigned in 1965), and each time Farrel appointed another person rather than herself.
- Farrel died in October 1969. Her estate filed a federal estate tax return excluding the trust corpus from the gross estate.
- The IRS assessed an estate-tax deficiency asserting inclusion of the trust property under I.R.C. § 2036(a)(2). The estate paid the deficiency, filed a refund claim, and brought a refund suit in the United States Court of Claims on stipulated facts.

## Issues

1. Whether the trust principal was includible in Farrel’s gross estate under I.R.C. § 2036(a)(2) because she retained, until death, a contingent power to appoint herself as successor trustee and thereby share discretionary control over distributions.

## Decision

- The Court of Claims held that the trust corpus was includible in Farrel’s gross estate under I.R.C. § 2036(a)(2).
- The court concluded that Farrel’s retained power to appoint a successor trustee—including the ability to appoint herself—was a retained right to designate who would possess or enjoy the trust property or its income because trustees held discretionary distribution power.
- The court rejected the estate’s refund claim and sustained the government’s assessment.

## Legal Principles

- Under I.R.C. § 2036(a)(2), transferred property is included in a decedent’s gross estate if the decedent retained the right, alone or with another, to designate the persons who shall possess or enjoy the property or its income.
- A retained power can fall within § 2036(a)(2) even if its exercise is subject to a contingency beyond the decedent’s control and the contingency does not occur before death (as reflected in Treasury regulations applying § 2036).
- The statute applies regardless of the capacity in which the power would be exercised; the ability to place oneself in a fiduciary role with discretionary distribution authority is treated as a power to determine enjoyment for § 2036(a)(2) purposes.
- For § 2036(a), the focus is on rights retained from the time of the transfer through death; the absence of actual control at the moment of death and nonexercise of the power do not prevent inclusion.
- Payment of gift tax on an irrevocable transfer does not bar later estate inclusion when the transfer falls within § 2036(a)(2).

## Conclusion

Because Farrel retained a continuing, contingent power to appoint herself successor trustee of a trust whose trustees had broad discretion to distribute income and principal among beneficiaries, she retained a § 2036(a)(2) right to designate who would possess or enjoy the trust property or its income; therefore, the trust corpus was properly included in her gross estate and the estate was not entitled to a refund.


Estate of Farrel v. United States, 553 F.2d 637 (1977)