The Crummey Road.

• Author: Schuster, Randi A.
• Position: IRS rules on when gift tax exclusions will be allowed

Estate tax practitioners have long been challenged with converting future interests into present interests eligible for the $10,000 per donee annual gift tax exclusion. Reliance on Crummey, 397 F2d 82 (9th Cir. 1968), provided the vehicle for qualifying transfers to a trust as a present interest. Trust beneficiaries are granted a right to withdraw all or a portion of the annual transfers to the trust, with the withdrawal right typically lapsing after a stated period of time. That window of opportunity makes the transfer a present interest.

Two issues have been troublesome:

1. Who can be counted as a beneficiary for purposes of the annual gift tax exclusion?

2. What type of notice must be given to the beneficiaries of their withdrawal rights?

Est. of Cristofani, 97 TC 74 (1991), involved an individual who created an irrevocable inter vivos trust to which she made annual contributions of the two years preceding her death. The decedent's two children were the primary beneficiaries and her five minor grandchildren were contingent remainder beneficiaries.

The trust provided that, for 15 days after contributions of property to the trust, each of the seven beneficiaries had an unrestricted right to withdraw an amount not to exceed the annual exclusion. The IRS disallowed the annual exclusions attributable to the grandchildren. The Tax Court held for the estate and the Service originally acquiesced in this decision.

However, in Letter Ruling (TAM) 9532001, the IRS began to whittle away at Cristofani. (See Tax Clinic, "Annual Exclusion Gifts Require Special Care When Using Crummey Powers," TTA, May 1996.) In the ruling, the decedent and her spouse created a trust for their nine grandchildren, who were granted withdrawal rights. The trust agreement granted these rights without any notice requirements for the initial transfers to the trust. For any subsequent transfers, the donor or her spouse had to provide written notice designating the beneficiaries who could make withdrawals with respect to the transfers for their benefit. There could be no withdrawal without such notice, but no notice was ever given. To make matters worse, each beneficiary signed a statement on the trust's creation, waiving withdrawal rights but retaining the right to revoke this waiver for future gifts. The Service ruled that the beneficiaries never had present interests in this trust because:

--the beneficiaries waived their rights to withdraw the initial gift and to receive...