IRS curbs use of Crummey powers.

• Author: Olshin, Ira C.

A very common estate planning technique (and one employed in most insurance trusts) is the granting of Crummey withdrawal powers to trust beneficiaries. The inclusion of such powers in a trust agreement enables the grantor to qualify gifts to the trust for the Sec. 2503(b) gift tax annual exclusion, thereby avoiding gift tax or use of the lifetime unified credit.

Normally, gifts to trusts do not qualify for the gift tax annual exclusion, because they are almost always considered transfers of future interests; only transfers of present interests are eligible for the exclusion.

Law

Under Sec. 2503(b), the first $11,000 of gifts (other than gifts of future interests in property) made by a donor to any donee during a calendar year are excluded from the total gifts made during such year. Thus, an individual can make "present interest gifts" of up to $11,000 per year per donee, with no limit on the number of donees, without having those gifts treated as taxable gifts.

For example, if a donor desired to benefit 20 of his or her closest friends and family, he or she could gift (and, thus, remove from his or her estate) a total of $220,000 a year, without gift tax or use of the available lifetime credit, provided each of the gifts were gifts of present interests. If the donor followed this gifting pattern over a 10-year period, he or she could effectively remove $2.2 million from his or her estate gift tax free, with no depletion of the lifetime credit. Thus, annual exclusion gifts are an extremely powerful tool.

Regs. Sec. 25.2503-3(b) defines a present interest in property as "an unrestricted right to the immediate use, possession or enjoyment of property or income from property (such as a life estate or term certain)." In contrast, Regs. Sec. 25.2503-3(a) defines a future interest in property to include "reversions, remainders, and other interests or estates, whether vested or contingent ... which are limited to commence in use, possession, or enjoyment at some future date or time."

Donors often prefer making gifts in trust for the benefit of family members, rather than gifting them outright, especially when the potential donees are minors or individuals who cannot presently be trusted to effectively manage a gift. Gifts in trust, however, are typically future interest gifts, because the trust provisions often delay the beneficiaries from using or enjoying the trust property until a later date. To ensure that gifts in trust qualify for the gift...