Avoid Crummey Mistakes: Take Care in Structuring Trust Withdrawal Powers

In Crummey v. Commissioner, 397 F.2d 82, 88 (9th Cir. 1968), the Ninth Circuit held that a gift in trust qualified for the gift tax annual exclusion because the trust’s beneficiaries had the power to withdraw a portion of the gifted assets. Since then, including such withdrawal powers in trusts has become standard operating procedure for estate planners. Despite their advantages, such “Crummey powers” complicate trust drafting and can cause tax problems that extend beyond eligibility for the annual exclusion. Common mistakes include (i) conditioning Crummey powers on the beneficiaries’ receipt of written notice; (ii) unclear descriptions of the powers; and (iii) failing to address adverse tax consequences caused by releases of such powers.

Crummey Powers Conditioned on Notice

The ” Crummey notice” has taken on near-talismanic status among estate planners. Certainly, the trustee of a Crummey trust should be directed (or at least strongly encouraged) to give each beneficiary holding a Crummey power a written notice specifically describing the beneficiary’s rights over each transfer to the trust. However, the trust should never condition a beneficiary’s withdrawal power on delivery of such notice. Indeed, some of the beneficiaries in Crummey likely were not aware of their withdrawal powers; nevertheless, the court ruled that all of the gifts to the trust qualified for the annual exclusion. After Crummey , the IRS announced its position that a gift in trust qualifies as a present interest (a prerequisite for the annual exclusion) only if the beneficiary has actual — not necessarily written — notice of the right. Rev. Rul. 81-7; see also PLR 80-22-048.