Gift Tax Implications of Arbitration and In Terrorem Trusts Provisions

In a recent Tax Court case, a married couple claimed a gift tax exclusion for up to the annual exclusion amount for gifts they each made to a Crummey trust. The IRS disallowed the exclusions because the beneficiaries lacked a “present interest in the property.” The IRS based their position on the beneficiaries’ inability to legally enforce the rights due to an arbitration and in terrorem provisions.

In Mikel v. Commissioner, the Tax Court granted partial summary judgment to the Mikels, finding that the trust transfers were a present interest. The court reasoned that the beneficiaries could still enforce their rights through arbitration, and the in terrorem provision did not prevent enforcement of withdrawal rights but only prevented challenges to a trust distribution.

See Steve R. Akers, Impact of Arbitration or “In Terrorem” Provisions in Crummey Trusts—Mikel v. Commissioner, T.C. Memo. 2015-64. (April 6, 2015), Bessemer Trust, Apr. 2015.