There is a yearly exclusion from gift tax of $11,000 per year per donee in 2003 (the amount rises periodically). This applies only to gifts of present interests. A gift in trust is not considered a present interest. For instance there is a gift in trust if you give money to a trustee to hold and pay the income to grandchildren each year until the youngest reaches 25 when all the rest of the trust assets are distributed to them. Since the grandchildren cannot get the trust assets presently, this is not considered a present gift.

If the children are given a right to withdraw the money contributed to the trust for a limited time after the contribution, then their interest in the contribution is a present interest and the contribution qualifies for the gift tax annual exclusion. The right to withdraw the contribution is called a Crummey power after a case by this name in which the principal was established.

The beneficiary who has power to withdraw the contribution or leave it in the trust is said to have a power of appointment. The beneficiary can appoint who gets the contribution - in effect either the beneficiary or the person who gets the trust assets after the beneficiary's interest ends. Unfortunately exercise of a power of appointment in favor of someone else - or expiration of the right to exercise the power with the result that someone else then gets the property - constitutes a gift. When the trust income beneficiary decides not to withdraw the contribution and his or her right to withdraw expires the result is that the contribution stays in the trust as principal and ultimately passes to the remainderman. This is a gift to the remainderman. Since the remainder is not a present interest this gift does not qualify for the yearly exclusion.

There is an exception to the rule that the expiration (lapse) of a power of appointment can constitute a gift. To constitute a gift the property subject to the power must be the greater of $5000 or 5% of the value of the assets out of which the exercise could be satisfied. For this reason Crummey withdrawal rights are often limited to $5000.

Crummey rights are often seen in trusts used to make gifts to children who are minors or persons who have no ability to manage investments. They are also often seen in irrevocable life insurance trusts where the grantor must make continuing payments to the trust to enable it to pay the premiums on the life insurance.

Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
Ph: 312-782-0844 * Fax: 312-201-1436 * Email: donthompsonlaw@sbcglobal.net