Estate and Trust Forum
| Publication year | 1980 |
| Pages | 1858 |
1980, September, Pg. 1858. Estate and Trust Forum
1858
No gift tax is imposed on the first $3,000 of property given to any person if the donee receives a present interest in such property.(fn1) A present interest is defined as:
[a]n unrestricted right to the immediate use, possession, or enjoyment of property or the income from property (such as a life estate or term certain).(fn2)
In Crummey v. Commissioner,(fn3) the U.S. Court of Appeals for the Ninth Circuit held that donees received a present interest in property given to trusts established under trust agreements containing the following language:
With respect to ... additions [to the Trust], each child of the Trustors may demand at any time (up to and including December 31 of the year in which a transfer to his or her Trust has been made) the sum of Four Thousand Dollars ($4,000.00) or the amount of the transfer from each donor, whichever is less, payable in cash immediately upon receipt by the Trustee of the demand in writing and in any event, not later than December 31 in the year in which such transfer was made. Such payment shall be made from the gift of that donor for that year. If a child is a minor at the time of such gift of that donor for that year, or fails in legal capacity for any reason, the child's guardian may make such demand on behalf of the child. The property received pursuant to the demand shall be held by the guardian for the benefit and use of the child.(fn4)
In that case, the Internal Revenue Service (IRS) had argued that no present interest could be created when the demand right was given to a trust beneficiary who was a minor if no guardian had been appointed for such minor. The court held in favor of the taxpayer, noting that under California law the trustee could not legally have resisted a demand by a minor beneficiary for property from the trust. Thus, each minor beneficiary had a present interest in the property given, even though, without a guardian, he was unlikely to exercise his demand right while a minor.
While the IRS has never acquiesced in Crummey, it has cited this case favorably in two Revenue Rulings and in eight Letter Rulings.(fn5) Therefore, it would appear that practitioners may now safely utilize a Crummey clause in a trust agreement to give a beneficiary a present interest in gifts to the trust, whether or not the terms of the trust agreement would otherwise create such a present interest. In doing this, however, several factors should be considered.
Before using a Crummey clause, a practitioner should be sure to explain to his client that significant legal rights will be conferred upon those beneficiaries who are given any demand right. The client must understand that he runs the risk of having one or more gifts to the trust withdrawn. This might be of particular concern if the trust were funded only with the client's certificate of group term life insurance. In that case, the value of the insurance in the trust could never exceed the value of the last premium paid by the client or his employer to...
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