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IRS Attacks Crummey Powers
Staff Reporters
In the [in]famous 1991 case of Cristofani v. Commissioner, the Tax Court ruled that the IRS had improperly disallowed gift-tax exclusions to contingent beneficiary grandchildren while allowing exclusions for withdrawal rights given to the donor’s children. The IRS had reasoned that the withdrawal rights of the contingent beneficiary grandchildren did not constitute gifts of present interests in property.
Literature Review
An article by Lawrence Brody and Stephen B. Daiker, “IRS Questioning Legitimacy of Crummey Powerholders” [Journal of Financial Planning, October 1996, pp. 34–35, Institute of Certified Financial Planners (303) 759-4900], presented the IRS’s position with respect to limited withdrawal powers given to trust beneficiaries to qualify transfers to the trust(s) as annual exclusion gifts.
Technical Advice Memorandum
In a July 1996 Technical Advice Memorandum [TAM], the IRS ruled that none of the withdrawal powers granted in that case were gifts of present interests in property and, therefore, did not entitle the donor to gift-tax annual exclusions. These particular irrevocable trusts did not require that actual notice of the withdrawal rights be given to the beneficiaries, and the powerholders had no beneficial trust interest other than the Crummey power.
Also, notices were given to powerholders only days prior to expiration of the withdrawal period, and the trust bank account was not funded until after expiration of the withdrawal period. The IRS also believed that there was a “prearranged understanding” that the Crummey withdrawal right would not be exercised or that doing so would result in unfavorable consequences—including possible disinheritance.
The IRS position
The IRS position seemed to be that if the powerholder has no economic interest in the trust to provide an incentive to allow the withdrawal right to lapse, the annual exclusion will not, in its view, be available. This common-sense approach to Crummey powerholders unfortunately does not clarify whose rights can or cannot be counted.
Assessment
Most likely, there will be additional litigation or rulings in this area, but it appears that medical practitioners, and their advisors, should ascertain that trusts require actual notice to beneficiaries of limited withdrawal rights; that timely notices and trust funding be provided; and that there be no evidence of a “prearranged understanding” regarding withdrawals.
Conclusion
Your thoughts on Crummey powers are appreciated; please opine and comment. Has the situation changed drastically, if at all, since this ruling?
Related Information Sources:
Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759
Physician Financial Planning: http://www.jbpub.com/catalog/0763745790
Medical Risk Management: http://www.jbpub.com/catalog/9780763733421
Healthcare Organizations: www.HealthcareFinancials.com
Health Administration Terms: www.HealthDictionarySeries.com
Physician Advisors: www.CertifiedMedicalPlanner.com
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Filed under: Accounting, Estate Planning, Financial Planning, Taxation | Tagged: Crummey power |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
SEC Rule IA-2968, which went into effect on March 10, 2010, increases regulation and scrutiny of independent financial advisors who act as trustees for their clients’ accounts.
Acting as trustee, or even general POA, is contstrued as the advisor taking possession of the clients’ assets, and this subjects the advisor to a possible Surprise Audit by the SEC. For the physician, this has the effect of greatly limiting those professionals who are willing to act as trustee for your trust.
Brian J. Knabe MD CMP™
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Crummey Service
Did you know that CrummeyService is a new web-based solution to the administrative problems of Crummey trusts?
It automatically sends gift and premium payment reminders, creates Crummey notices informing beneficiaries of their withdrawal rights. It sends the notices to beneficiaries; records acknowledgement of the notices and sends copies to trustees, grantors, fiduciaries and advisors to the trust. It relieves the attorney and trustee of tedious hard copy storage and administration.
http://www.crummeyservice.com/
And, the publisher’s website includes a presentation on the nature of this service and screenshots of sample notices and reports.
Giles
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