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Keep Those Crummey Notices Coming

Estate planners (and many clients) are familiar with Crummey powers. They are the neat trick that an enterprising taxpayer named Crummey and his attorney found about 25 years ago to turn a gift which wasn’t eligible for the annual gift tax exclusion into one which was.

Here’s how the game is played (most commonly with an insurance trust). The trust provides that any time the trustee receives a gift to the trust, a notice is to be sent to the beneficiaries designated in the trust instrument. Those beneficiaries then have a limited time period from the date of the notice (frequently 30 days) in which to demand the withdrawal of the money. If the beneficiaries do not withdraw the money, it becomes the property of the trust (i.e., usually the trustee takes the money and pays the insurance policy’s annual premium). In the absence of the withdrawal right, at least some portion of a gift to a trust usually is not eligible for the gift tax annual exclusion. However, where Crummey powers exist, the beneficiaries had the right to withdraw the money and that right converts the gift to the trust to one fully subject to the annual gift tax exclusion. So, if the gift is $10,000 or less, no gift tax is payable.

The system has created some tensions. On the one hand, the IRS has never liked Crummey trusts but has been unable to get the courts to see things its way. Attorneys who draft Crummey trusts and clients who use them tend to want to reap the benefits of Crummey powers while paying as little attention as possible to the paperwork and administration they require. So, over the years, shortcuts have developed. Crummey notices sometimes were not sent. Some trustees have attempted to secure perpetual waivers of Crummey notices from the applicable beneficiaries.

Over the years, courts have held that the benefits of Crummey powers require compliance with the administrative burdens and have struck down particularly casual treatments of the rules. Now, things are getting more serious.

Over the last year or so, the IRS has made it clear that it will require stricter compliance with the Crummey rules. The most important thing this means is that Crummey notices must go out. While some commentators have indicated that under some circumstances one blanket notice may be sufficient, all are agreed that the safest approach to Crummey notices is to send a new one out every time a gift to a trust is made—and to send the notice by a means, such as certified mail, return receipt requested, which provides proof of delivery. Alternatively (or additionally), the beneficiary can be asked to sign a copy of the notice and return it to the trustee. Should the trustee be audited, the notices will all be there, ready to be shown to the friendly IRS agent.

The consequences of non-compliance may be unpleasant. Insufficient documentation can result in disallowance of the gift tax deductions and, while this may not result in any immediate payment of tax, it may have an adverse impact on other aspects of estate planning, such as the availability of the entire unified credit. In any case, disallowance is a result to be avoided.

If you are thinking of creating a trust you are well advised to discuss it with us. We know the rules and we will be glad to help you deal with them.


MEISLIK & MEISLIK
66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 • info@meislik.com