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Income, Gift, and Estate Tax Aspects
of Crummey Powers After the
2001 Tax Act, Part 1
By Sebastian V. Grassi Jr.
T
he need for Crummey withdrawal right trusts, such
as irrevocable life insurance trusts or Code § 2642(c)
grandchild trusts, among other things, has not been
diminished by the Economic Growth and Tax Relief and
Reconciliation Act of 2001, Pub. L. No. 107–16, 115 Stat. 38
(2001) (“2001 Tax Act”). The uncertainty surrounding the
permanency of the repeal of federal estate taxes and generation-skipping transfer (GST) taxes, because of the Act’s
sunset provisions, which take effect January 1, 2011, and
reinstate the pre-2001 Tax Act transfer tax regime, underscores the need for clients with estates greater than $1 million to consider the use of irrevocable trusts as a means of
transferring appreciating property or life insurance to the
grantor’s descendants and removing it from inclusion in
the grantor’s gross estate. Because the gift tax applicable
exclusion amount remains frozen at the $1 million level
(even if the estate and GST tax is permanently repealed),
grantors will want to use their available annual exclusion
amount under Code § 2503(b) before using their $1 million
gift tax applicable exclusion amount. Thus, the Crummey
trust with its corresponding right of withdrawal granted to
the beneficiaries will serve as a useful tool when the
grantor wants to preserve his or her $1 million gift tax
Sebastian V. Grassi Jr. is a partner in the Troy, Michigan
law firm of Grassi & Toering, PLC. This article is adapted
from Grassi, A Practical Guide to Drafting Irrevocable Life
Insurance Trusts (ALI/ABA 2003).
applicable exclusion amount. A Crummey withdrawal
right is simple in concept but complex in terms of its tax
implications.
This article is divided into two parts. Part 1 discusses
various common income, gift, and estate tax issues that an
attorney may encounter, or want to consider, when drafting Crummey powers under the 2001 Tax Act. Part 2, which
will appear in the March/April 2004 issue, will discuss the
generation-skipping transfer tax aspects of Crummey powers under the 2001 Tax Act.
Income Tax Aspects of
a Crummey Withdrawal Right
An irrevocable trust is a separate taxpayer, unless (1) the
trust is a defective grantor trust under Code §§ 671–677 (in
which case the grantor will be taxed on the trust’s income)
or (2) a nongrantor (such as a Crummey withdrawal right
beneficiary) is treated as the owner of the trust for income
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tax purposes under Code § 678 (in
which case the nongrantor will be
taxed on the trust’s income).
Under Code § 678, a person other
than the grantor is treated as the
owner (for income tax purposes) of
any portion of a trust for which such
person (such as a Crummey withdrawal right beneficiary) either (1) has a
power exercisable solely by himself to
vest the corpus or the income from the
corpus in himself (such as a beneficiary with a Crummey withdrawal right),
or (2) has previously partially released
or modified such a power and afterward retains sufficient control, which
would make the grantor taxable as the
owner under the grantor trust rules. If
the grantor holds a power under Code
§§ 673 through 677 and the beneficiary
holds a Code § 678 power (such as a
Crummey withdrawal right) over the
same income, the beneficiary’s power
is disregarded, and the grantor is taxed
as the owner of the trust income. The
Code is, however, unclear concerning
the grantor being taxed as the owner
of the principal, because Code § 678(b)
refers only to “income,” whereas Code
§ 678(a)(1) refers to a beneficiary’s
power to vest “corpus or the income
therefrom.” Several commentators are
of the opinion that this incongruency is
a drafting error, and that the grantor
trumps the beneficiary as to both
income and corpus. In several PLRs
the IRS has taken the position that the
grantor is treated as the owner of the
corpus (whenever possible) despite the
existence of a Code § 678 power (of
withdrawal) held by a beneficiary.
PLRs 9321050, 9309023, 9140127,
8308033, 8326074, 8142061, 8103074,
and 7909031.
An additional incongruency is
found in the language of Code
§ 678(a)(2) itself, which refers to a beneficiary who has “previously partially
released or otherwise modified such a
power and after the release or modification retains such control as would,
within the principles of Code §§ 671 to
677, inclusive, subject grantor of a trust
to treatment as the owner thereof.”
(Emphasis added.) The Code refers to
a “release,” and a release connotes an
affirmative act on the part of the hold-
er of the power. A lapse, on the other
hand, requires no action by the holder
of the power. Interestingly, Congress
found it necessary to expressly state
that a lapse of a general power of
appointment is a “release” for estate
and gift tax purposes. The failure of
Congress, however, to make a similar
statement for income tax purposes
appears to be an indication that
Congress did not intend to equate a
lapse with a release for the grantor
trust rules.
Gift Tax Aspects of a Crummey
Withdrawal Right
Annual Exclusion Gifts
For a gift to qualify as a gift of a present interest that is eligible for the annual gift tax exclusion, the donee must
have the unrestricted right to the
immediate use, possession, or
enjoyment of the property or the
income from the property. Treas.
Reg. § 25.2503–3(b). A Crummey withdrawal right over a contribution to a
trust constitutes an unrestricted right
to the immediate use, possession, or
enjoyment of the contributed property
and converts what would otherwise be
a gift of a future interest into a gift of a
present interest that qualifies for the
annual gift tax exclusion under
Code § 2503(b). Crummey v.
Commissioner, 397 F.2d 82 (9th Cir.
1968); Rev. Rul. 73–405, 1973–2 C.B.
321. Over the years the IRS has
attempted to place limits on the expansion of the class of beneficiaries eligible
to hold Crummey withdrawal rights.
Generally, the IRS officially recognizes
only Crummey withdrawal right beneficiaries who hold a current income
38 PROBATE & PROPERTY JANUARY/FEBRUARY 2004
interest or vested remainder interest in
the trust, provided there is no preexisting understanding between the
grantor and the beneficiaries concerning the non-exercise of their withdrawal rights. TAM 9731004; PLR 9030005;
Rev. Rul. 85–24, 1985–1 C.B. 329; and
Rev. Rul. 81–7, 1981–1 C.B. 474. But see
Estate of Cristofani v. Commissioner, 97
T.C. 74 (1991), AOD 1996–010; Estate of
Kohlsaat v. Commissioner, 73 T.C.M.
(CCH) 2732 (1997); Estate of Holland v.
Commissioner, 73 T.C.M. (CCH) 3236
(1997) (in which the Tax Court implicitly rejected the IRS’s “prearranged
understanding” test and permitted
Crummey withdrawal rights to qualify
for the gift tax annual exclusion when
the beneficiaries had discussed in
detail the purpose of the trust and
their desire to not exercise their right
of withdrawal).
The IRS will not issue advance rulings concerning the availability of the
annual gift tax exclusion involving
irrevocable life insurance trusts with
Crummey withdrawal rights. Rev. Proc.
82–22, 1982–1 C.B. 469.
A Crummey withdrawal right granted to a spouse is a nondeductible terminable interest and does not qualify
for the gift tax marital deduction
(although the withdrawal right may
qualify for the annual gift tax
exclusion under Code § 2503(b)).
Code § 2523(b). If the donee-spouse is
not a U.S. citizen the annual gift tax
exclusion amount available to the
donor-spouse (concerning present
interest gifts) to a non-U.S. citizen
donee-spouse is, however, increased
from $10,000 (indexed for inflation) to
$100,000 (indexed for inflation) per calendar year. Code § 2513(i). There is no
gift tax marital deduction available for
gifts to the non-U.S. citizen spouse.
A grantor’s irrevocable contribution
to a trust on December 31 is a completed gift as of that date (for gift tax purposes), even though the beneficiary
does not receive notice of the contribution until several days later and the
beneficiary’s Crummey withdrawal
right does not expire until 30 days
thereafter. Rev. Rul. 83–108, 1983–2
C.B. 167. If the grantor dies shortly
after delivery of a gift check to the
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trustee, the gift check will be considered a completed gift when it is
deposited, cashed against available
funds, or presented for payment in the
calendar year for which completed gift
treatment is sought, if certain conditions are met. See Rev. Rul. 96–56,
1996–2 C.B. 161; see also Estate of
Metzger v. Commissioner, 100 T.C. 204
(1993), aff’d, 38 F.2d 118 (4th Cir. 1994).
Gift Splitting by Donor
Gift splitting under Code § 2513, when
used with a hanging withdrawal
power or with trust beneficiaries having separate trust shares coupled with
testamentary powers of appointment,
permits the grantor to make annual
gifts to a Crummey trust that are twice
the amount of the grantor’s available
annual gift tax exclusion amount. Gift
splitting is available to the grantor if
(1) the spouse is a resident of the
United States or a U.S. citizen, (2) the
spouse is married to the grantor at the
time of the gift, and (3) the spouse
does not remarry during the remainder of the calendar year. Gift splitting
is particularly helpful in large premium cases. A donor cannot elect gift
splitting for gifts to his or her spouse;
in other words, a donee spouse cannot
elect to split gifts to himself or herself.
Code § 2513(a)(1). If the donor transfers property in part to his spouse and
in part to third parties, the election to
split such a gift by the donee spouse is
effective only “with respect to the interest
transferred to third parties only insofar as
such interest is ascertainable at the time of
the gift and hence severable from the interest transferred to [the donee] spouse.”
Treas. Reg. § 25.2513–1(b)(4) (emphasis
added). If the donee (consenting)
spouse has an annuity, life estate,
remainder interest, or other determinable interest, the third parties’
interests would be ascertainable and
would be eligible for gift-splitting.
When the donee (consenting) spouse
and other beneficiaries have Crummey
withdrawal rights over the gifted
property, the amount subject to withdrawal by the other beneficiaries
would be ascertainable and thus eligible for gift splitting. See PLRs 8044080,
8112087, 8138012, 8138171, 8138170,
8143045, 200130030. The amount subject to withdrawal by the donee (consenting) spouse, however, would not
be eligible for gift splitting. If the
donee (consenting) spouse does not
have a Crummey withdrawal right over
the gift property but does have a general power of appointment over all the
gift property, the gift cannot be split.
Treas. Reg. § 25.2513–1(b)(3). If the gift
is not subject to withdrawal rights and
the trust is a common “pot” trust from
which the donee (consenting) spouse
and the other beneficiaries may all
receive distributions, the gift cannot be
split because there are no readily ascertainable interests. See Rev. Rul. 56–439,
1956–2 C.B. 605; Kass v. Commissioner,
16 T.C.M. (CCH) 1035 (1957); and
Wang v. Commissioner, 31 T.C.M. (CCH)
719 (1972). This is because the donee
spouse’s and the other beneficiaries’
interests cannot be ascertained. If the
Gift splitting is not
appropriate when
transferring an
existing life insurance
policy into a
generation-skipping
Crummey trust.
trustee is directed (that is, “shall” in
contrast to “may”) to make distributions under an ascertainable standard
(for example, for the donee spouse’s
health, education, support, and maintenance), the value of the third party
(nonspouse) beneficiaries’ interests
should be ascertainable. See TAM
9419007; Estate of Regester v.
Commissioner, 83. T.C. 1 (1984); Rev.
Rul. 79–327, 1979–2 C.B. 342 (which
relate to taxable gifts upon the exercise
of a limited power of appointment
over a trust with ascertainable standards). In such an instance, that portion of the gift could be split with the
donee (consenting) spouse. The
amount of the gift that may be split is
the value of the property transferred
by the donor less the donee (consent-
ing) spouse’s ascertainable interest in
the property, which is a factual determination. See Falk v. Commissioner, 24
T.C.M. (CCH) 86 (1965).
Merely consenting to split gifts
made in trust with the donor
spouse does not make the donee (consenting) spouse, who is also a trust
beneficiary, a transferor for purposes
of the retained interest rules of
Code §§ 2035–2038. Code § 2513(a)(1);
PLR 200113030. Therefore, to avoid the
Code § 2036 trap inherent when a
Crummey trust income beneficiary
transfers money to a Crummey trust
(such as transfers by the grantor and
the grantor’s spouse, who is also a
Crummey trust beneficiary), only the
grantor should make gifts to the
Crummey trust, and any gifts of the
grantor in excess of the Code § 2503(b)
amount should be split with the
spouse under Code § 2513.
Gift splitting is not appropriate
when transferring an existing life
insurance policy into a generationskipping Crummey trust. If the transferor-grantor dies within three years of
the transfer, the policy proceeds will be
included in his or her estate under
Code § 2035 (thus changing the identity of the transferor for GST tax purposes) and the spouse’s previously allocated GST exemption will be lost and
wasted, resulting in an inclusion ratio
of .50 (instead of 0). The better
approach is not to gift split and instead
to have the transferor-grantor allocate
his or her GST exemption to the trust
at the time of the initial transfer of the
life insurance policy.
The amount available for withdrawal by a beneficiary should not depend
on the donor spouse’s election to split
the gift. PLR 8022048. Rather, the
amount available for withdrawal
should be based on the assumption that
a married donor’s spouse will elect to
split the gift amount, whether or not the
election is made. PLR 8044080.
Beneficiary’s Lapse of a Crummey
Withdrawal Right
As previously mentioned, Crummey
withdrawal powers in an irrevocable
trust convert a future interest gift
into a present interest to qualify
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for the annual gift tax exclusion under
Code § 2503(b). A Crummey withdrawal right is a general power of appointment. Code §§ 2514 and 2041. Extreme
care must be used when inserting
Crummey withdrawal powers in an
amount greater than $5,000 or 5%
of the value of the trust assets.
Code § 2514(b) indicates that the exercise or release of a general power of
appointment will be treated as a transfer by the individual who released the
power. Under Code § 2514(e) a
lapse of a power of appointment is
considered a release. A specific
exception to this rule is set forth under
Code §§ 2514(e)(1) and (2), which state
that the lapse of a power (and not a
release or a waiver of the power) not
exceeding $5,000 or 5% of the value of
the assets out of which the power can
be satisfied will not be treated as a
transfer. What this means is that a
lapse of a Crummey withdrawal right
in excess of the “5 and 5” limitation
will be treated as a transfer to the other
trust beneficiaries by the Crummey
withdrawal beneficiary. A lapsed withdrawal right within the “5 and 5” limits will continue to be treated as a
transfer by the donor. A lapse in excess
of the “5 and 5” statutory protection
amount can cause disastrous estate,
gift, and GST tax consequences. For
example, if a trust was established
with an initial gift contribution of
$11,000, and the spouse was the only
Crummey withdrawal right beneficiary
and was given a $11,000 withdrawal
right that lapsed, the spouse would be
deemed to be the transferor of the
amount of the withdrawal right in
excess of $5,000, to wit, $6,000. In this
example the spouse would be the
deemed transferor of 55% of the trust
assets ($6,000 excess ÷ $11,000 trust
value) and because the spouse held a
life interest in the trust, 55% of the
trust assets would be includable in the
spouse’s estate for federal estate tax
purposes. Treas. Reg. § 20.2041–3(d)(4).
Furthermore, the spouse would also be
a transferor for GST purposes over the
$6,000 and the grantor’s previously
allocated GST tax exemption would be
ineffective and wasted. This would
require the spouse to allocate $6,000 of
his or her GST tax exemption to main-
tain a zero inclusion ratio. Treas.
Reg. § 26.2652–1(a)(5), Example 5.
Because a lapse in excess of the “5 and
5” amount constitutes a taxable release
by the holder of the power, it is usually
best to limit a beneficiary’s right of
withdrawal amount to the lesser of (1)
the gift contribution amount or (2) the
greater of the “5 and 5” amount. This
will ensure that when the withdrawal
right lapses it will fall within the safe
harbor amount of Code § 2514(e).
Without such a limitation on the
amount of the withdrawal right, the
lapse of the withdrawal right in excess
of the “5 and 5” amount (absent a
hanging right of withdrawal or the
beneficiary having a separate trust
share and holding a testamentary
power of appointment over the
amount of the withdrawal right
in excess of “5 and 5” (Treas.
Reg. § 25.2511–2(b) and PLR 9030005))
will constitute both a taxable release
under Code § 2514(b) and an immediate gift of a future interest to the other
Crummey trust beneficiaries. When the
beneficiary dies, however, the assets
subject to the taxable release that the
beneficiary retained a power of
appointment over (even a testamentary
limited power of appointment) will be
includable in the beneficiary’s gross
estate. Code §§ 2038 and 2041(a)(2).
There are two ways to deal with the
taxable release and gift over problem.
The first is to establish initially separate trust shares for each Crummey
trust beneficiary and give the beneficiary a testamentary limited power of
appointment over his or her trust
share or over the amount in excess of
the “5 and 5” amount. This will prevent the lapsed amount in excess of
the “5 and 5” limitation from being a
completed gift to the other trust beneficiaries. Treas. Reg. § 25.2511–2(b);
PLR 9030005. But the separate trust
share coupled with a testamentary limited power of appointment will not
avoid the taxable release problem of
Code § 2514(e). Consequently, when
the beneficiary dies, the assets over
which the beneficiary retained a testamentary limited power of appointment (that is, the amounts in excess of
the “5 and 5” limitation) will be
included in the beneficiary’s gross
40 PROBATE & PROPERTY JANUARY/FEBRUARY 2004
estate under Code § 2041(a)(2). In
addition, because the beneficiary has
a retained interest in the separate
trust, all or a portion of the value of
the trust share will be included in the
beneficiary’s gross estate upon his or
her death. Code § 2036(a); Treas.
Reg. §§ 20.2041–3(d)(4). The effect of
cumulative taxable releases with a
retained interest by the beneficiary
may result in all (or a significant
portion) of the beneficiary’s separate
trust share being included in
his or her gross estate. Treas.
Reg. § 20.2041–3(d)(5). Generally, this
approach will work best in Crummey
trusts in which (1) the grantor’s spouse
is not a beneficiary, (2) the Crummey
trust is not designed to be a long-term
generation skipping dynasty trust, and
(3) the beneficiary’s estate would most
likely incur little or no federal estate tax
(because of its modest size) if the beneficiary were to die before the termination of his or her interest in the
Crummey trust. The second way is to
allow the Crummey withdrawal right to
continue with regard to any amount in
excess of the “5 and 5” limitation. This
is known as a hanging Crummey power
(or hanging right of withdrawal).
Although the IRS has not favorably
ruled on the use of hanging Crummey
powers, the one ruling on this issue
seems to suggest that if the hanging
power is not drafted as a condition
subsequent, it should be okay. PLR
8901004. A spouse should never be
given a hanging Crummey power in a
generation-skipping trust because the
spouse’s power may be deemed to create an estate tax inclusion period
(ETIP), which will prevent the grantor
from allocating his or her GST exemption until the close of the ETIP.
The purpose of a hanging Crummey
power is twofold: first, to permit larger
trust contribution amounts that qualify
for the annual gift tax exclusion
amount, and, second, to avoid adverse
estate and gift tax consequences under
Code §§ 2514(b) and 2036(a) to the
trust beneficiaries who hold Crummey
withdrawal rights. This is achieved by
having the beneficiary’s withdrawal
right be a cumulative power of
withdrawal that lapses every
calendar year in the amount specified
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in Code § 2514(e)(1) and (2). If a beneficiary dies while possessing a hanging
power that has not fully lapsed, the
value of the unlapsed hanging power
will be included in the beneficiary’s
gross estate. Code § 2041(a)(2). The
beneficiary will also become the (new)
“transferor” for GST purposes, and the
beneficiary’s executor may need to
allocate GST tax exemption to the
included amount. Fortunately, there
are no gift tax consequences to a beneficiary while he or she holds a
Crummey withdrawal right that has
not yet lapsed.
Beneficiary’s Waiver or Release of a
Crummey Withdrawal Right
Because a Crummey withdrawal right
is a general power of appointment, a
beneficiary’s waiver of the right of
withdrawal constitutes a taxable
release (and not a lapse) of a general
power of appointment and constitutes
a taxable gift of a future interest to the
other trust beneficiaries. To avoid this
adverse tax consequence the beneficiary should not waive the right to withdraw the trust contribution; rather, the
beneficiary should merely permit the
right of withdrawal to lapse. Also, a
lapse of a beneficiary’s Crummey withdrawal right in excess of the “5 and 5”
amount constitutes a taxable release of
a general power of appointment and
constitutes a taxable gift of a future
interest to the other trust beneficiaries.
To avoid this adverse tax consequence
the beneficiary’s right of withdrawal
should either be limited to the “5 and
5” amount or be subject to continuing
lapse under a hanging power of withdrawal that lapses annually at the rate
of the “5 and 5” amount.
Beneficiary’s Annual Limit on
“5 and 5” Safe Harbor Lapses
Rev. Rul. 85–88, 1985–2 C.B. 202, holds
that only one “5 and 5” safe harbor
lapse is permitted per calendar year
per donee for all powers of withdrawal available to that donee during the
year. Multiple withdrawal powers
held by the same donee over the same
or different trusts must be aggregated
to determine whether or not they violate the “5 and 5” safe harbor amount.
See also G.C.M. 39371 (1985).
Estate Tax Aspects of a
Crummey Withdrawal Right
because the lapse does not constitute
a taxable release of the power.
Code §§ 2041(a)(2) and (b)(2).
Retained Life Estate by Grantor
If the grantor is a beneficiary of the
Crummey trust, a retained interest in
the gifted property (for example, the
grantor’s beneficial interest in the
Crummey trust or the grantor’s right to
vote [directly or indirectly] shares of a
controlled corporation that the grantor
has gifted to the Crummey trust) will
result in inclusion of the trust property
in his or her estate. Code § 2036
includes in a decedent’s estate any previously transferred property (for less
than full and adequate consideration
in money or money’s worth) in which
the decedent retains for his or her lifetime the use or enjoyment of the
income and/or corpus of the transferred property. Therefore, the grantor
of the Crummey trust should not be a
beneficiary of the trust. The rules of
Code § 2036 apply both to the grantor
and the Crummey trust beneficiaries.
For example, if there is a taxable
release of a Crummey withdrawal
power and the beneficiary causing the
release retains an income-for-life interest in the trust (or an interest that is
otherwise ascertainable), the beneficiary has transferred property to the
trust (to wit, the property subject to the
taxable release) and has retained an
interest in the released property for
purposes of Code § 2036(a). In this
instance the beneficiary is also a
“grantor” of the Crummey trust and a
portion (if not all) of the trust
estate may be included in the beneficiary’s gross estate. See Treas.
Reg. § 20.2041–3(d)(4). If the grantor’s
spouse is a beneficiary of the Crummey
trust, it is important that the spouse
not make gift contributions to the trust
(other than consenting to the splitting
of gifts made by the grantor).
Deceased Beneficiary’s Lapse of a
Crummey Withdrawal Right
If a beneficiary dies after his or her
Crummey withdrawal right has
lapsed within the “5 and 5” limits
imposed by Code §§ 2514(e) and
2041(b)(2), the lapsed amount is not
included in the beneficiary’s estate
Deceased Beneficiary’s Unlapsed
Crummey Withdrawal Right
Although the termination of a
Crummey withdrawal right during the
power holder’s lifetime may not be a
taxable release if the right of withdrawal (or rate of lapse under a hanging right of withdrawal) is limited
under the “5 and 5” safe harbor rules of
Code §§ 2514(e) and 2041(b)(2), if the
power holder dies before the termination (that is, lapse) of the withdrawal
right (whether it is a single right of withdrawal or a hanging right of withdrawal), the amount of the unlapsed right of
withdrawal for the year of death will be
included in the estate of the holder of
the power. Code § 2041(a)(2). In addition, the holder of the power will
become the (new) “transferor” of the
unlapsed power for GST tax purposes,
and the GST tax exemption previously
allocated by the grantor will be lost and
wasted. Treas. Reg. § 26.2652–1(a)(2).
Deceased Beneficiary’s Waiver
or Release of a Crummey
Withdrawal Right
The gross estate of a decedent includes
the value of property subject to a general power of appointment that was
released or exercised before the decedent’s death if the result of the release or
exercise is the creation of a retained
interest described in Code §§ 2035, 2036,
2037, or 2038. Code § 2041(a)(2). If a
beneficiary waives his or her Crummey
withdrawal right or allows his or her
Crummey withdrawal right (which, as
previously mentioned, is a general
power of appointment under Code
§§ 2514 and 2041) to lapse in an amount
greater than the “5 and 5”safe harbor
amount described in Code §§ 2514(e)
and 2041(b)(2), the waiver or lapse of
that Crummey withdrawal right will be
treated as a taxable release of a general
power of appointment for transfer tax
purposes. In addition, the holder of the
power will become the (new) transferor
of the released power for GST purposes.
Treas. Reg. § 26.2652–1(a)(2). The fact
that the beneficiary holds a testamentary limited power of appointment over
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the property subject to the taxable
release will not avoid inclusion of that
property in the beneficiary’s gross
estate. Code § 2041(a)(2). The testamentary limited power of appointment over
the released property will prevent, however, the taxable release from being a
completed gift (to the other Crummey
trust beneficiaries) at the time of its
release under Code § 2514(b). Treas.
Reg. § 25.2511–2(b). If the Crummey trust
provides the beneficiary with a lifetime
income interest in the trust, an estate tax
problem arises because the beneficiary
has made a transfer (of the amount of
the taxable release) with a retained life
income interest in the trust property.
Code § 2036(a). When the beneficiary
dies, a percentage of the Crummey trust
will be included in his or her gross
estate. The percentage included will be
based on a fraction—the numerator is
the amount of the release and the
denominator is the amount of the value
of the Crummey trust at the time of the
release. Treas. Reg. §20.2041–3(d)(4).
Multiple or cumulative taxable releases
are aggregated. Treas. Reg.
§ 20.2041–3(d)(5).
Executor’s Right to Recover Estate Tax
Attributable to General Power of
Appointment
The executor of a decedent’s estate is
entitled to recover federal estate taxes
paid by the estate that are attributable
to property over which the decedent
held a general power of appointment,
and which property is included in the
decedent’s gross estate. The executor’s
right of apportionment/recovery is on
a pro rata basis. A decedent can opt out
of the recovery/apportionment provisions of this Code section by stating so
in his or her will. A general provision
in the decedent’s will to pay all taxes
from residue will be sufficient to opt
out of the Code’s apportionment/
recovery scheme. Because a Crummey
withdrawal right is a general power of
appointment and may be included in a
beneficiary’s estate under Code § 2041,
who should be responsible for the federal estate taxes in such instance? The
Crummey trust may be an unfunded and
illiquid life insurance trust and unable
to reimburse the beneficiary’s estate
under the recovery rules of Code § 2207.
Executor’s Right to Recover Estate
Tax Attributable to Grantor’s Retained
Interest
The executor of a decedent’s estate is
entitled to recover federal estate taxes
paid by the estate that are attributable
to property or interests in property that
are included in the decedent’s gross
estate under Code § 2036. The executor’s right of apportionment/recovery
is on a marginal or incremental basis. A
decedent can opt out of the recovery/
apportionment provisions of this Code
section by stating so in his or her will or
revocable living trust. Specific reference
42 PROBATE & PROPERTY JANUARY/FEBRUARY 2004
to Code § 2207A (or its provisions) in
the decedent’s will or revocable living
trust is required to opt out of the Code’s
apportionment/recovery scheme. If the
beneficiary releases the Crummey withdrawal right (which, as previously
mentioned, is a general power of
appointment) and retains an interest in
the trust that is included in the beneficiary’s estate under Code § 2036, who
should be responsible for the federal
estate taxes? The Crummey trust may be
illiquid and unable to reimburse the
beneficiary’s estate under the recovery
rules of Code § 2207B. Crummey trust
property may be included in the
grantor’s gross estate because the
grantor retained the right to vote shares
of stock described in Code § 2036(b).
But which section of the Code applies
for apportionment/recovery when the
retained interest results in the life insurance proceeds being included in the
grantor’s gross estate? Code § 2206 calls
for pro rata reimbursement, whereas
Code § 2207B calls for incremental
reimbursement. A possible solution
may be for the grantor’s will to require
all apportionment/reimbursement
under Code §§ 2206–2207B to be on an
incremental basis.
To Be Continued
This article will conclude its discussion
of the income and transfer tax aspects
of Crummey demand powers in the
March/April 2004 issue. ■