## Facts

- Daniel A. Shaw bought a $100,000 life insurance policy in 1919 and, in 1926, selected a settlement option dividing the principal into four $25,000 funds for his wife, Bessie Love Shaw, and their three daughters.
- The option directed the insurer to pay interest on each fund to the named beneficiary for life.
- Upon a beneficiary’s death, the insurer was required to pay that fund’s principal and any accrued unpaid interest to the beneficiary’s “executors or administrators.”
- Daniel died in 1930; Bessie received interest on her $25,000 fund during her lifetime.
- Bessie died in 1964 with a will leaving her residuary estate equally to her daughters.
- After Bessie’s death, the insurer paid the $25,000 (plus accrued interest) to the executor of her estate as required by the settlement option.
- The executor filed a federal estate tax return excluding the $25,000 from the gross estate, asserting no taxable exercise of a pre-October 21, 1942 general power of appointment.
- The United States assessed a deficiency; the executor paid and sued for a refund. The district court ruled for the estate, and the government appealed.

## Issues

1. Whether the 1926 insurance settlement option gave Bessie Love Shaw a general power of appointment over the $25,000 fund for federal estate tax purposes.
2. If so, whether Bessie exercised that pre-October 21, 1942 power so that the fund was includible in her gross estate.

## Decision

- The Fifth Circuit reversed the judgment for the estate.
- The court held that the settlement option conferred a general power of appointment because Bessie had practical control over the fund’s ultimate disposition at death through her will.
- The court further held that Bessie exercised the power by executing a will that controlled distribution of property passing through her estate, including the $25,000 fund.
- The $25,000 fund and accrued interest were includible in Bessie’s gross estate.

## Legal Principles

- A general power of appointment exists for estate tax purposes when the decedent has effective authority to determine who will receive the property at death, even if the property must first pass to the decedent’s estate.
- “Distributory suzerainty” over the final distribution of a fund constitutes a general power of appointment when the decedent can direct the property freely and without restriction, regardless of the fund’s source.
- For powers created before October 21, 1942, inclusion in the gross estate turns on whether the power was exercised.
- A testamentary instrument can constitute an exercise of a general power of appointment when it operates as the mechanism by which the decedent directs the fund’s ultimate recipients.

## Conclusion

The Fifth Circuit held that life-insurance proceeds payable to the decedent’s estate under a pre-1942 settlement option were includible in the gross estate because the decedent held a general power of appointment based on effective testamentary control and exercised that power through her will.


Keeter v. United States, 461 F.2d 714 (5th Cir. 1972)