Chapter 2 - § 2.9 • 5 AND 5 POWERS AND CRUMMEY POWERS

• Jurisdiction: Colorado

§ 2.9 • 5 AND 5 POWERS AND CRUMMEY POWERS

A trust beneficiary may be given an annual non-cumulative power to withdraw the greater of $5,000 or 5 percent of the value of the trust principal ("5 and 5 power"). If the beneficiary holds a 5 and 5 power, no "release" is deemed to occur when the unexercised power lapses, and no "transfer" for gift tax purposes is made by the 5 and 5 power holder.²⁷¹ A " Crummey power" refers to a right triggered upon a contribution to a trust that permits a beneficiary to withdraw all or a portion of the contribution, typically for a limited period of time.²⁷² The purpose of a Crummey power is to qualify a transfer in trust for the gift tax annual exclusion. The power will be drafted so as to limit the right to the gift tax annual exclusion amount and may, but will not necessarily, also be limited to the 5 and 5 amount. Some Crummey powers, referred to as "hanging powers," may grant the power holder the right to withdraw a contribution for an extended period of time. The amount subject to the hanging power will lapse annually to the extent of the 5 and 5 amount for each succeeding calendar year.

Whether the creditors of a 5 and 5 power holder or a Crummey power holder can reach the assets of a trust, and whether the lapse of such a power turns the power holder into a settlor of the trust, is a matter of applicable state law.

In the Colorado case of University National Bank v. Rhoadarmer,²⁷³ a beneficiary's non-cumulative power to withdraw up to the greater of $5,000 or 5 percent of the trust principal was held to be "neither property nor a property right" but "a mere right or power, a personal privilege or authority."²⁷⁴ The trial court held that the creditor's writ of garnishment entitled the creditor to reach the amount that was subject to the withdrawal right for the two years after the writ of garnishment was served. The appellate court reversed and held that absent the exercise of the power, no property held by the trust was susceptible to garnishment.

In Colorado, non-beneficiary spouses have argued in divorce proceedings that 5 and 5 powers and Crummey powers cause a portion of a trust to constitute "property" for purposes of a property division because the lapse of the power is treated as a contribution to the trust by the power holder, thereby making the power holder a settlor of the trust. At least with respect to trust instruments governed by Colorado law, it may be argued, correctly in this author's opinion, that Rhoadarmer applies, at least by analogy, and for the purposes of a property division, the beneficiary-power holder would not be considered a settlor of the trust as to lapsed...