Using a Crummey trust to preserve gift tax exclusion.

• Author: Ellentuck, Albert B.

A gift qualifies for the annual gift tax exclusion ($14,000 for 2014) only if the transfer is of a present interest in the property. A present interest is defined as an unrestricted right to the immediate use, possession, or enjoyment of the property or the income from it. This present interest requirement often prevents a gift to a trust from qualifying for the annual gift tax exclusion if the trust accumulates income and defers the distribution of principal.

A favorite tool of practitioners is the Crummy trust. It satisfies the present interest requirement while allowing the donor to avoid the requirement of the Sec. 2503(c) trust that all income and principal be distributed to the beneficiary at age 21 and the requirement of the Sec. 2503(b) trust that all income be distributed currently. It was named after a 1968 decision by the Ninth Circuit Court of Appeals that was subsequently accepted by the IRS in Rev. Rul. 73-405 (Crummey, 397 F.2d 82 (9th Cir. 1968)).

In the typical Crummey trust, a periodic contribution of assets to the trust is accompanied by an immediate withdrawal power that gives the beneficiary the right to withdraw the contribution for a limited time. However, the expectation of the donor is that the power to withdraw will not be exercised (although there should be no express agreement to this effect). The beneficiary's limited withdrawal right (a Crummey power) causes the gift to the trust to be a gift of a present interest that can be sheltered by the annual gift tax exclusion. It is the presence of a legal right, not the likelihood of its exercise, that is the determining factor.

In Letter Ruling 199912016, the IRS considered four factors in determining whether a beneficiary's withdrawal (Crummey) right qualified gifts to a trust as present interest gifts:

1. The trust is required to give the beneficiary reasonable notice in which to exercise the withdrawal right;

2. The beneficiary is given adequate time following notice in which to exercise the withdrawal right;

3. Upon exercising the withdrawal right, the beneficiary will have the immediate and unrestricted right to an amount equal to the amount contributed to the trust; and

4. There is no understanding or agreement, expressed or implied, that the withdrawal will not be exercised.

Withdrawal Right

The trust's beneficiary must be given actual notice of the withdrawal right along with a reasonable period to exercise it, generally considered to be 30 days or longer. The...