## Facts

- Ethel H. Kurz was beneficiary of two trusts created at her husband’s death: a Marital Trust and a Family Trust.
- Under the Marital Trust, Kurz received income and could withdraw as much principal as she wished by written notice to the trustee; the estate conceded she held a general power of appointment over this trust.
- Under the Family Trust, Kurz received income and could withdraw principal only up to 5% in any year, and only after the Marital Trust was exhausted.
- At Kurz’s death (1986), the Marital Trust held about $3.5 million and the Family Trust about $3.4 million.
- The estate reported the full Marital Trust in the gross estate but excluded the Family Trust.
- The IRS determined that Kurz held a general power of appointment over 5% of the Family Trust and required inclusion of that portion in the gross estate under I.R.C. § 2041(a)(2); the Tax Court upheld the determination.
- The estate argued the power was not “exercisable” at death because the Marital Trust had not been exhausted.

## Issues

1. Whether a withdrawal right over 5% of a trust corpus is “exercisable” at the decedent’s death under I.R.C. § 2041(b)(1) when it is conditioned on exhaustion of another trust.
2. Whether the condition’s being within the decedent’s control (because she could exhaust the other trust at will) makes the conditional right a general power of appointment includible under I.R.C. § 2041(a)(2).

## Decision

- The Seventh Circuit affirmed the Tax Court.
- The court held that Kurz possessed a general power of appointment over 5% of the Family Trust at death.
- Because Kurz could unilaterally exhaust the Marital Trust, the condition precedent to withdrawing 5% of the Family Trust was within her control, making the power “exercisable” for § 2041 purposes.
- The 5% portion of the Family Trust (about $170,000) was properly included in the gross estate; the remaining 95% was not subject to inclusion on this theory.

## Legal Principles

- Under I.R.C. § 2041, property subject to a general power of appointment held by the decedent at death is included in the gross estate.
- A power is “exercisable” under § 2041(b)(1) when the holder can satisfy or remove a condition to exercise the power through her own actions.
- A conditional power may be treated as nonexistent at death when the condition is outside the decedent’s control; when the condition is within the decedent’s control, the power exists at death even if never exercised.
- When the decedent has an unrestricted right to deplete one fund, a second fund conditioned on depletion of the first can create an includible general power of appointment over the portion reachable upon depletion.

## Conclusion

The court held that a conditional right to withdraw 5% of the Family Trust constituted an includible general power of appointment because the decedent could have exhausted the Marital Trust at will, thereby satisfying the condition and making the power legally exercisable at death under I.R.C. § 2041.


Estate of Kurz v. Commissioner, 68 F.3d 1027 (7th Cir. 1995)