Article by Bradley E.S. Fogel
The federal gift tax annual exclusion allows a donor to give $10,000 per calendar year to an unlimited number of individuals free of gift tax. The exclusion is unavailable for gifts of “future interests.” Most gifts in trust are at least partially future interests, therefore the exclusion is unavailable for these gifts. In order to make a gift trust that qualifies for the federal gift tax annual exclusion to withdraw the gift from the trust, the donee may be given a temporary power called a Crummey power. In 1972, the IRS begrudgingly acquiesced to the use of Crummey powers. Taxpayers have sought to multiply the number of available annual exclusions by giving Crummey powers to individuals who had no other interest in the trust (such withdrawal powers are called “naked” Crummey powers), but who can be expected not to exercise their withdrawal rights. In response, the IRS has recently attempted to require that, in order to obtain the annual exclusion, the individual who holds the withdrawal power must also have a significant interest in the trust. The IRS's attempt to impose this restriction on the use of Crummey powers, however, has met with little success in the courts. Indeed, the distinctions drawn by the IRS between Crummey powers lack substance. Further, the IRS's argument relies on analysis based solely on an individual's s economic self-interest in the intra-family context. In this context, however, an individual generally does not act solely for economic self-gain. Thus, there is no logical basis for IRS's proposal for the new restriction the use of Crummey powers. Indeed, the use of both Crummey powers and naked Crummey powers are supported equally well by court precedent (in which the IRS has acquiesced) and by published and private IRS rulings.
About the Author
Bradley E.S. Fogel. Visiting Assistant Professor of Law, Widener University School of Law, Harrisburg, Pennsylvania. LL.M. (Taxation), New York University; J.D. Columbia University School of Law.
Citation
73 Tul. L. Rev. 555 (1998)