## Facts

- Charles W. McNear, by will, left his residuary estate in trust with The First National Bank of Chicago (First National) as trustee.
- McNear’s daughter, Janice McNear Towle (Janice), was the trust’s income beneficiary; her son, Charles McNear Towle, and his descendants were remainder beneficiaries.
- The trust held three life-insurance settlement contracts on McNear’s life (post-October 21, 1942 contracts).
- The settlement contracts gave Janice a noncumulative right each year to withdraw a fixed sum from principal.
- The contracts also allowed Janice to withdraw the entire remaining principal at any time, but only with the consent of First National.
- The trust instrument also authorized the trustee, in its sole and “absolute” discretion, to distribute principal to Janice when income was insufficient for her support, comfort, maintenance, or education, and stated that this discretion was not subject to challenge by any beneficiary.
- Janice died on October 14, 1964, with a substantial principal balance still remaining in the settlement contracts; after her death, the retained principal was collected by First National and added to the residuary trust corpus for the remaindermen.
- The executor filed an estate tax return that did not include any amount for a general power of appointment over the insurance settlement contract proceeds.
- The IRS determined an estate-tax deficiency (stipulated at $27,920.45), asserting that Janice held a general power of appointment over the contract proceeds under I.R.C. § 2041, making the proceeds includible in her gross estate.
- The estate petitioned the United States Tax Court; the case was submitted on stipulated facts.

## Issues

1. Whether Janice’s power to withdraw the entire remaining principal of the insurance settlement contracts, exercisable only with the consent of the trustee, was a “general power of appointment” under I.R.C. § 2041, requiring inclusion of the proceeds in her gross estate.
2. Whether the trustee’s required consent meant the power was exercisable only “in conjunction with” a person having a “substantial interest” adverse to exercise of the power under § 2041(b)(1)(C)(ii).
3. Whether the trustee’s authority to invade principal for Janice’s “support, comfort, maintenance or education,” described as “absolute” and not subject to question, imposed an “ascertainable standard” that would keep the power from being general under § 2041(b)(1)(A).

## Decision

- The Tax Court held Janice possessed a general power of appointment over the insurance settlement contract proceeds (beyond the fixed annual withdrawal right) because she could obtain the entire principal with the trustee’s consent.
- The court rejected the estate’s claim that the trustee’s consent requirement brought the power within § 2041(b)(1)(C)(ii), because First National, as a nonbeneficiary trustee, did not have a substantial adverse interest in the property subject to the power.
- The court also rejected the claim that the trustee’s discretion was limited by an ascertainable standard under § 2041(b)(1)(A); the governing language gave the trustee broad, effectively unreviewable discretion rather than a narrow, measurable standard.
- Accordingly, the Commissioner’s deficiency determination was sustained and the relevant value of the settlement contract proceeds was included in Janice’s gross estate under § 2041(a).

## Legal Principles

- A power is a “general power of appointment” for § 2041 purposes when it is exercisable in favor of the holder, the holder’s estate, or the creditors of either, unless a statutory exception applies.
- A power exercisable only with another person’s consent is not excluded from “general power” treatment unless the coholder has a “substantial interest in the property” that is adverse to the power’s exercise (§ 2041(b)(1)(C)(ii)).
- A nonbeneficiary trustee’s participation in a consent requirement generally does not create a substantial adverse interest, because the trustee lacks a personal economic stake in the property itself; fiduciary status alone does not supply the adverse interest required by the statute.
- A discretionary distribution authority described as “absolute” and insulated from beneficiary challenge is not an “ascertainable standard” within § 2041(b)(1)(A); an ascertainable standard requires a reasonably definite, measurable limitation (commonly associated with health, education, support, or maintenance) that constrains distributions in a way that can be objectively applied.
- If neither the adverse-party exception nor the ascertainable-standard limitation applies, a beneficiary’s ability to obtain principal (even with trustee consent) can result in estate inclusion under § 2041(a).

## Conclusion

The Tax Court concluded that Janice’s trustee-consented ability to withdraw the entire remaining principal of the insurance settlement contracts constituted a general power of appointment under § 2041 because the trustee was not an adverse party with a substantial interest and its discretion was not confined by an ascertainable standard; therefore, the contract proceeds subject to that power were includible in her gross estate.


Estate of Towle v. Commissioner, 54 T.C. 368 (1970)