Tax Court rules notice not required for Crummey powers.

• Author: Ransome, Justin P.

Under Sec. 2503(b), a donor may exclude the first $13,000 of gifts made to each donee during a calendar year in determining the total amount of gifts for that calendar year (the "gift tax annual exclusion"). For a transfer to qualify for the gift tax annual exclusion, Sec. 2503(b) requires the transfer to be a gift of a present interest. Under Regs, Sec. 25.2503-3(b), a gift of a present interest requires that the donee has an unrestricted right to the immediate use, possession, or enjoyment of property or the income from it.

In general, most transfers to trusts fail to qualify as a gift of a present interest because the donee does not have an unrestricted right to the immediate use, possession, or enjoyment of the property or the income. To have transfers to a trust qualify as gifts of present interests, and thus be eligible for the gift tax annual exclusion, the trust's governing instrument generally contains a provision giving certain persons "withdrawal rights" with respect to transfers to the trust. A donee is usually given only a short time to exercise this withdrawal right before it lapses. This withdrawal right is drafted with the attributes acknowledged by the Ninth Circuit in Crummey, 397 K2d 82 (9th Cir. 1968), as meeting the requirements of the gift of a present interest.

Although Crummey did not explicitly so hold, the IRS's position is that the present-interest requirement is not satisfied (and thus, no gift tax annual exclusion is available) unless a beneficiary has actual notice of the withdrawal right and a reasonable time within which to exercise the right before its lapse. In Rev. Rul. 81-7, the IRS ruled that, if a beneficiary is not informed of the right to withdraw transfers to the trust, the beneficiary's right to immediate possession and enjoyment of the property is postponed, and he or she effectively receives a future interest at the time the gift is made. In so ruling, the IRS said that the power to demand corpus does not qualify a transfer to a trust as a present interest eligible for the gift tax annual exclusion under Sec. 2503(b) if the donor's conduct makes the demand right illusory and effectively deprives the donee of the power. Given this notice directive by the IRS, most trusts to which transfers are intended to qualify for the gift tax annual exclusion contain a provision in their trust instruments requiring that beneficiaries with a withdrawal power be given notice of the right to exercise this power by...