An update on Crummey powers.

The IRS recently issue Letter Ruling (TAM) 95320 addressed the proper use of Crummey powers. The Service sought to prohibit a trust beneficiary from waiving his right to receive future Crummey notices and waiving his right to withdraw any future gifts. Essentially, without the proper Crummey notices, future additions into the trust would no longer be considered gifts of present interests qualifying for the annual $10,000 gift tax exclusion under Sec. 2503(b).

In this ruling, a trust was created for the benefit of nine grandchildren, granting each beneficiary the right to withdraw a portion of the value of the trust. The trust also provided that if there were any additions to the trust, the beneficiaries would have the right to withdraw a portion of the gift for up to 75 days after the gift was made. (This is a typical power that was upheld a long time ago, in Crummey, 397 F2d 82 (9th Cir. 1968).

However, when the trust was created, each beneficiary also signed a statement waiving his right of withdrawal from the initial contribution and all future gifts, as well as the right to be notified of any future gifts. The beneficiaries also reserved the right to revoke their waivers.

Citing Fondren, 324 US 18 (1945), the IRS held that "a donee must have current notice of any gift in order for that gift to be a transfer of a present interest." Since the beneficiaries waived their rights to be notified and were not. notified of any future gifts, only the initial gift was considered to be a present interest gift.

When a gift to a trust is not a present interest gift, the donor is required to file a gift tax return and reduce his unified tax credit, or pay the resulting gift tax.

This ruling does not attack irrevocable life insurance trusts per se, but it certainly demonstrates that the administrative procedures that have been recognized by the courts must be followed. The benefits of an irrevocable life insurance trust are too great to lose by shortcutting any administrative procedures.