Crummey Powers — IRS Chief Counsel Disapproves of Restrictions

Crummey power gives a beneficiary the right to withdraw an amount from a trust for a short period of time right after the amount is added to the trust. The power exists because a gift has to be of a present interest to qualify for the annual exclusion of $13,000. Planners were worried about about a gutsy beneficiary power wanting that $13,000 right away, so they came up with some provisionary guidelines.

The first part of the instructions is standard: the trustee has “absolute discretion in administering the Trust for the benefit of Donor’s children, other lineal descendants, and their spouses.” When the crummey power comes up, the instructions are not so standard. “Each beneficiary may withdraw an amount of property…in any year in which a transfer is made to the trust.” The trustee can void this amount for additions made to the trust. The final provision The final provision says that state law determines the construction, validity, and administration of the trust, “but provision is made for other forum rules.” All questions have to be submitted to the other forum charged with enforcing the trust.

The Chief Counsel’s office was not ok with that provision because a beneficiary would face severe consequences if he were to seek legal redress. The chief counsel declared that those withdrawal rights are not legally enforceable to constitute a present interest and that they are illusory, so they will not work out.

See Peter J. Reilly, Crummey Powers Back to Arm Breaking Threats, Forbes, Mar. 9, 2012.  

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