Crummey Notifications: Are They Required?

Further exploring trust and tax compliance for present interest gifts

Table of Contents

1. Background, and Where We Left Off

2. Knowledge, Notice, and General Powers of Appointment

3. Present Interests and IRS Rulings

4. Turning the Tables in Turner

5. Terms of a Trust

6. Conclusion

Background, and Where We Left Off

In a prior article, we explored some of the case law that applies to Crummey withdrawal rights and notifications thereof.  But, the current landscape of Crummey notification compliance is not optimal.  All too often, we hear stories about notifications being prepared after the fact – sometimes egregiously (i.e., as a batch with many years in arrears). 

Without belaboring the ethical and professional issues in creating backdated documents with retroactive effect, one must wonder if perhaps we are better off doing nothing?

If we go back to the case that seemed to start it all – Crummey v. Commissioner, 397 F.2d 82 (9^th Cir. 1968) – we find an interesting quote.  Keep in mind the context of Crummey – whether a minor could effectively exercise a withdrawal right due to the legal disability of their age, and whether the absence of an appointed guardian at the inception of the withdrawal right would create a legal impediment to the exercise of that right by the minor.

Although under our interpretation neither the trust nor the law technically forbid a demand by the minor, the practical difficulties of a child going through the procedures seem substantial. In addition, the surrounding facts indicate the children were well cared for and the obvious intention of the trustors was to create a long term trust. No guardian had been appointed and, except for the tax difficulties, probably never would be appointed. As a practical matter, it is likely that some, if not all, of the beneficiaries did not even know that they had any right to demand funds from the trust. They probably did not know when contributions were made to the trust or in what amounts. Even had they known, the substantial contributions were made toward the end of the year so that the time to make a demand was severely limited. Nobody had made a demand under the provision, and no distributions had been made. We think it unlikely that any demand ever would have been made. 

Nonetheless, despite these assumptions by the 9^th Circuit, the withdrawal rights were deemed to create a valid present interest so long as no legal impediment existed under state law, or the terms of the trust, at the time the rights were created. 

However, this case did not mandate notification to the beneficiaries.  In fact, it even acknowledged the likelihood that no notice had been provided or would be provided and that, even if it was, it would have occurred so late in the year that the practical ability of a beneficiary to exercise the withdrawal right (through an appointed guardian if not a parent, the appointment of which likely would have taken longer than the limited window during which the right could have been exercised) would have been limited.

So, where did the notification requirement come from?  Before diving in, it is helpful to note another tax conundrum – the disconnect between the treatment of the donor, and the donee, with respect to “knowledge” of a withdrawal right.

Knowledge, Notice, and General Powers of Appointment

Without repeating some of the prior articles on Crummey powers, you may recall that these withdrawal rights are treated as presently-exercisable general powers of appointment in the hands of the power holder.  In fact, many of the gift and GST tax headaches of Crummey powers stem from this status. 

Stated differently, a presently-exercisable general power of appointment causes the power holder to be the gift, estate, and income tax owner of the assets which could be withdrawn.  And, it stands to reason that this outcome would be dependent on a certain level of knowledge about the existence of the Crummey withdrawal right. 

But, the tax effects on a holder of a general power of appointment apply even if the holder does not know about the power, or lacks the capacity to exercise it.