## Facts

- John J. Round, Sr. created three inter vivos spendthrift trusts in 1934–1935 for the benefit of his five minor children.
- In each trust, Round served as co-trustee with a corporate trustee; upon his death, resignation, or incapacity, the corporate trustee would act alone.
- The trusts gave trustees discretion to withhold and accumulate income otherwise payable to beneficiaries; accumulated income could become part of principal.
- The trusts also gave trustees discretion to distribute principal to beneficiaries under broad standards (e.g., “in case of emergency” or whenever distribution was deemed “desirable” and in the beneficiaries’ best interests).
- By 1956, Round’s capacity declined; he executed a general power of attorney to a child who handled most of his affairs.
- In October 1957, a probate court found Round incapable of managing his property and appointed a corporate conservator.
- Round died in April 1958; the executors did not report the trusts’ value in the gross estate.
- The Commissioner included the trusts in the gross estate and determined an estate tax deficiency; the Tax Court sustained the deficiency.

## Issues

1. Whether the trust property was includible in the gross estate under 1939 Code § 811(c) and (d) because Round, as co-trustee, retained powers affecting possession or enjoyment of trust income and principal until death.
2. Whether Round’s incapacity and the appointment of a conservator before death terminated his retained trustee powers so as to prevent estate inclusion.

## Decision

- The court affirmed the Tax Court’s decision sustaining the deficiency.
- The trusts were includible in the gross estate because Round retained, as co-trustee, discretionary powers over income accumulation and distributions of income and principal.
- Round’s diminished capacity and the conservatorship did not constitute a legally effective termination of his trustee powers before death.
- Because the trust instruments provided a formal resignation method and it was not used, Round’s legal status and powers as co-trustee continued until death.

## Legal Principles

- Property transferred to an inter vivos trust is includible in the gross estate where the settlor retains, for life, powers to affect the possession or enjoyment of the property or its income, including power to determine who will receive distributions and when.
- Discretionary trustee powers to withhold and accumulate income, and to invade or distribute principal under broad standards, are powers affecting enjoyment for estate-tax inclusion purposes.
- For estate-tax inclusion, “retention” of a power depends on the decedent’s continuing legal rights under the governing instruments and law; inability to exercise those rights due to incapacity, or management by a conservator, does not alone end the retained powers.
- Absent a resignation, removal, or other legally effective divestment consistent with the trust instrument, trustee powers remain outstanding through death and support inclusion under § 811(c) and (d) (now reflected in I.R.C. §§ 2036–2038).

## Conclusion

The court held that the settlor’s inter vivos trust assets were properly included in his gross estate because his co-trustee powers to accumulate income and to distribute income and principal remained legally in existence until death, and neither incapacity nor conservatorship eliminated those retained rights.


Round v. Comm’r, 332 F.2d 590 (1st Cir. 1964)