Why relying on Cristofani to draft trust withdrawal powers is a "Crummey" idea.

• Author: McCoskey, Gregory M.

The Internal Revenue Service recently issued two separate administrative pronouncements that substantially curtail aggressive use of so-called "Crummey powers." These two pronouncements[1] restate and clarify the IRS's position regarding its past acquiescence in Estate of Cristofani v. Commissioner,[2] which has been construed by some to allow annual gift tax exclusions based on a contingent or "naked" Crummey power.

Understanding Crummey, Powers

Use of the annual gift tax exclusion of $10,000 per donee is, and should be, an integral part of most wealth transfer planning. The first $10,000 of gifts of present interests in property made to any person by a single donor during the calendar year is exempt from gift tax.[3] With proper planning and documentation, married donors may give up to $20,000 annually to an individual donee through gift-splitting.[4] To qualify for the annual exclusion, the gift must be an unrestricted right to the immediate use, possession, or enjoyment of the property or the income from the property.[5] As we shall see, it is the present interest restriction on gift tax exemptions that gives Crummey powers their significance.

In the landmark decision of Crummey v. Commissioner,[6] the court upheld for the first time the application of the annual gift tax exclusion to gifts by a settlor to a grantor trust that had as its beneficiaries minor children with a limited right to withdraw the gift from the trust. Crummey holds that transfers by a grantor to a trust qualify for the annual gift tax exclusion, if the beneficiaries have a limited right to obtain all or part of the gift upon demand. Under Crummey, the limited demand right "transforms" the gift in trust to the beneficiaries from a future interest to a present interest, thus qualifying it for the annual gift tax exclusion.

Since Crummey, it has become de rigueur to insert in trust agreements a right for the contingent beneficiaries to obtain the present benefit of all or part of annual gifts during a limited window of time[7] in order to qualify those gifts for the $10,000 per donee annual gift tax exclusion. A typical "Crummey power" provides as follows:

Each beneficiary shall be notified at least annually by the trustee in writing, by registered mail, sent to a last known address or guardian's address, of any gifts to the trust and the amount thereof subject to the withdrawal rights hereinafter. granted. Upon receipt of this notification, a beneficiary shall have the right to demand distribution within 30 days of an amount equivalent to the beneficiary's pro rata share of total cash or property gifts made by the grantor to the trust during the reported period, but in no case shall the beneficiary have the right to demand distributions in one calendar year for an amount in excess of the annual gift tax exclusion contained in IRC [sections] 2503(b) or successor law. The withdrawal right shall not be cumulative and will lapse as to the annual reported amount if not validly exercised within the 30-day period

More complete Crummey powers might address notice and demand provisions for the guardian of a minor, the required form for exercise of beneficiary's demand right, or limitations on the amount subject to demand after consideration of the so-called "5 and 5" power.[8]

Crummey Refined

During the 43 years since Crummey was decided, the IRS, through various procedural mechanisms, has tightened the requirements for qualifying for the annual gift tax exclusion under the principles of...