Crummey Tax Trap.

• Author: JOSEPHS, STUART R.
• Position: Gift tax vs. generation-skipping transfer - Brief Article

Is "Relief" in Store To Conform Gift Tax and GST Tax Annual Exclusions?

Atrap for the unwary: that is what obtaining an annual exclusion for gift tax vs. generation-skipping transfer (GST) tax purposes can create for some unsuspecting tax advisers and their clients. This trap occurs if there is a transfer to a trust that is subject to both gift and GST taxes. If a "Crummey power" is used to qualify the transfer for the gift tax annual exclusion, the transfer may not qualify for the GST tax annual exclusion.

GIFT TAX ANNUAL EXCLUSION

Under IRC Sec. 2503(b), annual gifts of "present interests" up to $10,000 (indexed for inflation) per donor per donor are exempt from the gift tax. This exemption is called the annual exclusion. Generally, a transfer in trust is not considered a transfer of a present interest to a trust's beneficiary. However, in Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), a transfer in trust was considered a transfer of a present interest since the trust instrument permitted the beneficiary to withdraw the transferred amount for a limited period of time (often 30 days or less). Thus, so-called Crummey powers are often used to allow a transfer of a $10,000 gift to a trust to qualify for the annual exclusion.

In Crummey, the withdrawal power's holder was the trust's ultimate beneficiary. In more recent cases, such as Estate of Cristofani, 97 TC 74 (1991), and Estate of Kohlsaat, 73 TCM 2732 (1997), the trust agreement was drafted to give withdrawal rights to individuals who did not have substantial economic interests in the trust. However, by pre-arrangement or understanding, these individuals usually do not exercise those withdrawal rights.

GST TAX ANNUAL EXCLUSION

An annual exclusion also is available for the GST tax. However, the trap arises because, under IRC Sec. 2642(c), the GST tax annual exclusion does not apply to any transfer to a trust for an individual's benefit unless:

* During that individual's life, no portion of the trust's corpus or income may be distributed to, or for the benefit of, any other person; and

* If the trust terminates before the individual dies, the trust's assets will be includible in this individual's gross estate.

PRESIDENT CLINTON'S PROPOSAL

The Clinton administration is concerned that granting a withdrawal right to a person who does not have a primary interest in the trust to obtain the use of an additional gift tax exclusion constitutes an unreasonable, unintended expansion of the...