Why Relying on Cristofani to Draft Trust Withdrawal Powers Is a Crummey Idea

The IRS has issued new rules that restrict how people can use “Crummey powers” to avoid paying gift taxes. These rules clarify that a gift must be immediately available for the recipient to use in order to qualify for a tax exemption. This is important because it affects how much money can be given each year without being taxed. The rules are based on a court case from the 1950s that allowed gifts to be exempt from taxes if the recipient had a limited right to withdraw the gift. After the Crummey case, it has become common to include a provision in trust agreements that allows beneficiaries to receive a portion of any yearly gifts within a limited time frame. This helps the gifts qualify for the $10,000 per person annual gift tax exclusion. This provision, known as a “Crummey power,” gives beneficiaries the right to demand a distribution within 30 days of being notified of a gift to the trust. The amount they can demand is limited to the yearly gift tax exclusion amount. If they don’t exercise this right within the 30-day period, they lose it for that year.

Since the Crummey decision in 1968, the IRS has made it harder to qualify for the annual gift tax exclusion. They now require beneficiaries to have actual notice of their withdrawal rights, notice to be given to natural parents or guardians of minor beneficiaries, and contributions to the trust to be made before the notice period ends. However, the Tax Court expanded the Crummey provisions in Estate of Cristofani v. Commissioner, allowing annual gift tax exclusions for contingent beneficiaries with Crummey powers. The IRS has warned that they will deny exclusions for beneficiaries with no property interests in the trust except for Crummey powers, or who hold only contingent remainder interests. The IRS disagreed with the Tax Court’s interpretation of Crummey powers and plans to challenge other cases where the powers are being abused. Despite warnings from the IRS, lawyers are still using Crummey powers for estate planning. In one case, the IRS disallowed gift tax exclusions claimed for two trusts because the gifts were not completed within the required time frame for the Crummey powers to be valid. The IRS didn’t allow the annual gift tax exclusions for Trust C because they believed that the people with the power to withdraw the money didn’t have a good reason not to take it, and that the trust was created just to avoid paying taxes. They also said that the trust couldn’t have been split into separate trusts for each person with the power to withdraw the money, and still work the way it was supposed to. AOD 1996-010,25 comes after TAM 9628004 and supports the attack on Cristofani. The IRS approves of giving Crummey powers to certain beneficiaries, but not to others, based on their economic interest in the trust. The IRS also challenges the Tax Court’s reasoning about “legal right” and says that some restrictions on Crummey powers are not enough if they are likely to go unused. The IRS has come out with new rules that say giving someone a Crummey power in a trust doesn’t qualify for a gift tax exclusion if the person has no other interest in the trust. This means using Crummey powers to transfer wealth is no longer a good idea. The IRS is cracking down on this strategy, and it’s best to stay away from it.

Source: https://www.floridabar.org/the-florida-bar-journal/why-relying-on-cristofani-to-draft-trust-withdrawal-powers-is-a-crummey-idea/