Annual exclusions allowed for contingent trust beneficiaries.

• Author: Galli, Timothy L.
• Position: Brief Article

The IRS was dealt another blow in its attack on the number of annual gift exclusions allowed for a gift to a trust that includes contingent beneficiaries with Crummey powers. In Est. of Kohlsaat, TC Memo 1997-212, the Tax Court sided with the taxpayer and allowed 16 annual exclusions to be claimed, representing the interests of 16 contingent beneficiaries of a trust the taxpayer established less than three months before she died.

In March 1990, the decedent established an irrevocable trust and transferred to it a commercial building valued at $155,000. The decedent's two children were the primary beneficiaries; in addition, 16 grandchildren, great-grandchildren and a daughter-in-law were named as contingent beneficiaries. All of the trust beneficiaries were given "Crummey powers," i.e., the right to demand immediate distribution of up to $10,000 following each transfer of property to the trust. The beneficiaries were properly notified of their withdrawal rights on the transfer of the building to the trust, but none exercised them. The taxpayer died in June 1990. Annual exclusions were claimed for all of the beneficiaries, thus excluding the entire value of the building from the decedent's Federal estate tax return.

Consistent with the position adopted in Letter Ruling (TAM) 9628004 and AOD 1992-009 on Est. of Cristofani, 97 TC 74 (1991), the Service argued substance over form. In other words, the contingent beneficiaries: must have been instructed not to exercise their withdrawal powers and therefore were merely used to expand the number of annual exclusions available to absorb the gift value. However, since there were credible reasons why some of the beneficiaries did not exercise their withdrawal rights and no evidence of any prearranged plan not to exercise these rights, the Tax Court allowed all 16 exclusions.

Based on this decision, there are three criteria that must be satisfied to successfully use annual exclusions attributed to contingent beneficiaries of a trust. First, the trust must contain the requisite "Crummey language," allowing...