Gifts to trust qualify for annual exclusion.

• Author: Beavers, James A.
• Position: 2015 Tax Court memorandum decision in Mikel v. Commissioner

The Tax Court held that the withdrawal rights provided in a trust declaration were not illusory and that therefore a married couple's gifts to the trust were gifts of present interests in property that qualified for the annual exclusion.

Background

On June 7,2007, Israel and Erna Mikel established the I EM Family Trust, an irrevocable inter vivos trust. The trust's beneficiaries were the Mikels' children and lineal descendants and their respective spouses. On June 15, 2007, the Mikels jointly transferred property to the trust with an asserted value of $3,262,000. The trust at the time allegedly had 60 beneficiaries, many of whom were under 18 years of age.

For the year the trust was created and each subsequent year, Article V of the trust declaration allowed each of its beneficiaries to withdraw the lesser of a formula-derived amount or an amount equal to the maximum federal gift tax exclusion in effect at the time of the transfer. The trust was required to notify all beneficiaries (or, where applicable, their guardians) when it received property to which the beneficiaries had a demand right. The demand right was required to be exercised in writing and lapsed within 30 days.

In addition, Article VI of the trust declaration gave the trustees the power, "in their sole and absolute discretion," to make discretionary distributions from income and principal for the health, education, maintenance, or support of any beneficiary or family member and, in the trustees'" absolute and unreviewable discretion," to assist a beneficiary in defraying "reasonable wedding costs, ... purchasing a primary residence, or ... entering a trade or profession."

Article XXVI of the trust declaration provided that if any dispute arose concerning the proper interpretation of the distribution provision in Article VI, that the dispute "shall be submitted to arbitration before a panel consisting of three persons of the Orthodox Jewish faith" (in Hebrew, a beth din). The beth din was directed, in the event of any dispute, to enforce the trust declaration and give any party the rights he or she is entitled to under New York law and to construe the declaration as a whole "to effectuate the intent of the parties ... that they have performed all the necessary requirements" for the trust declaration to be valid under Jewish law.

Further, Article XXVI of the trust declaration contained an in terrorem provision designed to discourage beneficiaries of the trust from contesting the...