IRS Memo Regarding Crummey Trusts

The IRS recently released Memorandum 201208026 in which it addresses a question submitted regarding a Crummey Trust. A brief description of the facts, issues, and conclusions contained in the Memorandum are below:

Facts: Donor A and Donor B transferred assets to an irrevocable trust, gratuitously. The Donors designated their adult child, Child A, as the sole trustee and named their children, other lineal descendants, and their descendants’ spouses as beneficiaries. The trust, which terminates when both Donors die, states that the Donors renounce any power to determine or control the Trust income or principal, but they retain testamentary limited powers of appointment.

Under the terms of the Trust, Child A has absolute unreviewable discretion in the Trust’s administration for the benefit of the beneficiaries and may distribute income and principal at any time for the beneficiaries’ health, education, support, wedding costs, purchase of prime residence or business, or for any other purpose or for the benefit of a charitable organization. Beneficiaries may withdraw a certain amount of trust property in any year the Trust receives a transfer. The trustee may void these withdrawals, however, for additions made to the Trust.

Issues: (I) Whether the Donors made complete gifts on transferring the property to the Trust, and (II) whether I.R.C.§ 2503(b) allows annual exclusions for the withdrawal rights provided in the Trust.

Conclusions: (I) The Donors made complete gifts of the beneficial term interests on transferring the property to Trust, and (II) I.R.C § 2503(b) does not allow an annual exclusion for the purported withdrawal rights, making the withdrawal rights unenforceable and illusory.

 To view the Memorandum in its entirety, please click here:  Download Memorandum 201208026.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.