IRS Rules Crummey Powers are Illusory

by Bruce Givner on March 28, 2012

A mother sets up an irrevocable trust for her daughter.  The trust includes a provision allowing the daughter to ask for trust monies within 45 days after her mother makes a contribution.

Whether the monies are withdrawn, the mother can take a federal annual gift tax exclusion for any contribution up to $13 thousand.  The daughter is not taxed on any withdrawals regardless of the amount taken out.

This is a Crummey power provision, and the IRS has ruled if its powers are illusory, a federal gift tax exclusion is not allowed.  Crummey v. Commissioner, No. 21607 (9th Cir. 25 June 1968)

Crummey powers are commonly found in irrevocable trusts.  To qualify for the federal gift tax exclusion, a donor must make a gift to the trust.  The trust beneficiary must then be given prompt notice that a trust gift has been made, and a reasonable time and opportunity to withdraw the gift.  When the latter is compromised, a beneficiary does not have a present interest in the contribution, so the donor is not eligible for a federal gift tax exclusion.

The IRS Chief Counsel ruled that the withdrawal rights are illusory and the annual gift exclusion is unavailable when the trust:

  • Excludes a beneficiary from further participation in the trust if the beneficiary participates in a civil proceeding to enforce the trust (an in terrorem clause); and
  • Specifies an alternative form for resolution of any disputes.”.

If you need help with complex tax planning, call Givner & Kaye at (310) 207-8008.

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