Did your advisor blithely toss off technical terms and leave you wondering why you should pay them to draft a trust with "crummy" powers? They meant "Crummey" and thereby hangs a tale.

Very broadly, you may exclude from taxable gifts, gifts of up to $10,000 per person per year. However, that exclusion does not apply to gifts of "future interests". While outright gifts qualify, most gifts in trust are future interests and ordinarily wouldn't qualify for the exclusion.

Enter a brilliant attorney in California, who was drafting a trust on behalf of his clients, the Crummeys. He provided that, when the made gifts to the trust, their children would have the right to withdraw such gifts for a period of time. After that period, if they did not exercise such right, it would lapse and the property would remain in trust. After losing a court battle, the IRS conceded that such gifts would constitute present interests and qualify for the exclusion. This enables people to make non-taxable gifts in trust without giving their children early access to the money.

Over the years, the rules have evolved and become definite, although there are still areas in dispute.

The gift can be to a minor, who doesn't really have the power to act, as long as some adult (guardian, parent, etc.) has the power to make withdrawals on their behalf.

The beneficiary (or person on their behalf) must be informed of the gift and their right. This is usually done by giving them notice. In a private ruling, IRS has taken the position that they must be given notice each time -- that they cannot waive the right to notice. I disagree.

There may be no prearranged understanding that the beneficiary will not exercise their withdrawal power. IRS has argued that if remote beneficiaries don't exercise their powers, it is evidence of a prior understanding. The courts have disagreed.

Although excluded from the gift tax, such gifts do not qualify for exclusion from the Generation Skipping Transfer Tax . In such case, annual non-taxable returns may be filed to apply the exemption to the gifts, sheltering hopefully greater amounts that it will grow to.

The latest legislative proposals would deny this exclusion from gift tax.

Nothing is ever simple. A parent may give a child a lapsing right to withdraw $10,000 and exclude the gift from the parent's tax base. However, if the child allows to lapse a withdrawal power greater than $5,000 or 5% of the trust, *the child* makes a taxable gift. In order to minimize taxes at all levels, good planning and drafting takes these limitations into account.

Crummey powers are particularly useful in the case of irrevocable insurance trusts. They enable one to pay for tax-free insurance without using up one's lifetime shelter.

^Back to top


Website Copyright © 2004Web Design by Cherryone.com Website optimized by: Cherryone.com

Home ] [ Chicago Probate Attorney ] [ Chicago Probate Lawyer ] [ Illinois Probate Lawyer ] [ Probate Lawyer Chicago ] [ Chicago Tax Planning Lawyer ] [ Illinois Tax Planning Lawyer ] [ Chicago Wills and Trusts Attorney ] [ Illinois Wills and Trusts  Attorney ]