The Crummey Road.

Estate tax practitioners have long been challenged with converting future interests into present interests eligible for the $10,000 per donee annual gift tax exclusion. Reliance on Crummey, 397 F2d 82 (9th Cir. 1968), provided the vehicle for qualifying transfers to a trust as a present interest. Trust beneficiaries are granted a right to withdraw all or a portion of the annual transfers to the trust, with the withdrawal right typically lapsing after a stated period of time. That window of opportunity makes the transfer a present interest.

Two issues have been troublesome:

1. Who can be counted as a beneficiary for purposes of the annual gift tax exclusion?

2. What type of notice must be given to the beneficiaries of their withdrawal rights?

Est. of Cristofani, 97 TC 74 (1991), involved an individual who created an irrevocable inter vivos trust to which she made annual contributions of the two years preceding her death. The decedent's two children were the primary beneficiaries and her five minor grandchildren were contingent remainder beneficiaries.

The trust provided that, for 15 days after contributions of property to the trust, each of the seven beneficiaries had an unrestricted right to withdraw an amount not to exceed the annual exclusion. The IRS disallowed the annual exclusions attributable to the grandchildren. The Tax Court held for the estate and the Service originally acquiesced in this decision.

However, in Letter Ruling (TAM) 9532001, the IRS began to whittle away at Cristofani. (See Tax Clinic, "Annual Exclusion Gifts Require Special Care When Using Crummey Powers," TTA, May 1996.) In the ruling, the decedent and her spouse created a trust for their nine grandchildren, who were granted withdrawal rights. The trust agreement granted these rights without any notice requirements for the initial transfers to the trust. For any subsequent transfers, the donor or her spouse had to provide written notice designating the beneficiaries who could make withdrawals with respect to the transfers for their benefit. There could be no withdrawal without such notice, but no notice was ever given. To make matters worse, each beneficiary signed a statement on the trust's creation, waiving withdrawal rights but retaining the right to revoke this waiver for future gifts. The Service ruled that the beneficiaries never had present interests in this trust because:

--the beneficiaries waived their rights to withdraw the initial gift and to receive notices on their withdrawal rights over future gifts;

--there was no proof that any current notices were given to the beneficiaries; and

--neither the decedent nor her spouse notified the trustee in writing that any subsequent transfers could be withdrawn by any of the beneficiaries.

The IRS still was not satisfied. In AOD 1996-010, the Service emphasized that it acquiesced only in the result of Cristofani. The IRS stated that it would not contest annual gift tax exclusions for Crummey withdrawal rights when the trust instrument gives the power holders a bona fide unrestricted right to demand immediate possession and enjoyment of trust income or corpus, but would deny the exclusions if the withdrawal rights are not in substance what they purport to be in form.

Simultaneously with the release of this AOD, the Service released Letter Ruling (TAM) 9628004, involving a donor who created several trusts in which her children, grandchildren, great-grandchildren and grandchildren's spouses were given varying interests. Spouses were given only withdrawal rights and had no other interests in the trust. Depending on the particular trust, certain beneficiaries had no interests in the trusts other than withdrawal rights. No notice of withdrawal rights was given to any trust beneficiary and the actual time to exercise those rights was extremely short (four days before year-end in one trust). No withdrawal right was ever exercised. The IRS ruled that none of the transfers qualified for the annual exclusion, as the donor never intended to make bona fide gifts of present interests and the beneficiaries were given only "paper rights."

Even though the results are not pro-taxpayer, the letter ruling, AOD and TAM all signal that the Service will recognize annual exclusions for beneficiaries, provided the interests given to them are real and they receive notification with sufficient time to exercise their withdrawal rights.

Caution: Adding grandchildren or more remote beneficiaries may cause unexpected consequences. To maintain a zero inclusion ratio, an allocation of the generation-skipping transfer tax (GSTT) exemption may have to be made to all transfers to the trust (including transfers with respect to non-skip persons), even if a gift tax return would not otherwise have to be filed. This may cause wastage of the GSTT exemption if the grandchildren are merely contingent remainder interest holders and not ultimate distributees.