Anatomy of a Crummey Power: The Exercise Period

How long does a withdrawal right last?

Table of Contents

1. Intro and Background

2. Option One: Withdrawal Period Starts at Notice

3. Option Two: Withdrawal Period Starts at Contribution

4. Key Takeaways

Intro and Background

In prior coverage on Crummey powers, we have discussed some of the broad and more nuanced transfer tax principles surrounding such powers. As a quick reminder, “Crummey” powers is the colloquial term given to temporary, lifetime withdrawal rights granted to individuals under a trust. Without such powers, transfers in trust may not qualify for the gift tax annual exclusion because this exclusion only applies to gifts of present interests. By granting withdrawal rights over a trust when a contribution is made, the donor can argue that a donee’s access to the contributed assets is immediate and unrestricted – two basic criteria used by the Service to assess whether there is indeed a present interest.

Much of the focus of the Service has been on the latter element – whether the power is indeed unrestricted – and in fact this is the backbone of the 9^th Circuit’s holding in Crummey v. Commissioner, 397 F.2d 82 (1968). This case is often credited as the origin of the “Crummey” name, but it is not the origin of the proposition of whether these temporary withdrawal rights themselves grant a present interest. Instead, Crummey focused on whether such a withdrawal right granted to a minor was indeed immediate and unrestricted. After all, minors usually cannot act without a parent or guardian, and without a guardian already being in place (with the authority to exercise the withdrawal right on behalf of the minor) the Service argued that the right did not meet either requirement.

The 9^th Circuit, however, did not agree but in its conclusion impliedly focused on the unrestricted requirement in analyzing whether there was a legal impediment to the appointment of a guardian for purposes of exercising the power. The Court reasoned that the appointment of a guardian lent itself to the actual satisfaction of a demand right and not the effectiveness of the demand right itself, which is not necessarily time-sensitive as we will further discuss below. In other words, perhaps a timely demand itself could be made by a minor and the guardian could later be appointed for satisfaction of the demand.

In the wake of Crummey, there were several issues around which this question of whether a Crummey power is truly “unrestricted” were litigated. A lot of the focus of the Service has been on (1) whether the donee knew about the power, (2) whether there were any legal impediments in the trust or under applicable law that would prevent or “punish” a donee for exercising their power, and (3) whether donees who are not actually current or remainder beneficiaries after the lapse of a withdrawal right can truly be considered to have unrestricted powers since a failure to exercise such a power would be against their self-interest (thus implying the existence of circumstances by which the donor may be separately restricting the exercise of the power alone, or in concert with non-beneficiary donees).

As a result, many Crummey powers are drafted to meet this unrestricted requirement. Emphasis is placed on the provision of notice – often written notice so as to prove satisfaction of this requirement on audit – along with terms of the trust that support the exercise of a withdrawal right. But these withdrawal rights cannot last forever. At some point, the contributed funds are needed for the trust’s broader purposes and its other beneficiaries. For this reason, as noted above, Crummey powers have a finite duration. If the duration is too short, this is another factor in the eyes of the Service that lends itself to restriction – after all, how likely is a powerholder to get their act together and exercise a power if they only have a couple of days to do so?

This leads to a limited duration of the withdrawal right – with 15 or 20 days often serving as the minimum suggested amount. At the top of the bell curve we often find 30 days. At the other end, there is GST-tax significance to the maximum duration, as a spousal power in excess of 60 days can create an estate tax inclusion period (ETIP) that prevents automatic or affirmative allocation of GST exemption (possibly even after the power lapses if the lapse exceeds the $5,000/5% limitations).

There is a broader question, however, that arises. When does this withdrawal period start? And, might the answer to this question invoke the other requirement for a present interest – immediate enjoyment of the property?

Option One: Withdrawal Period Starts at Notice

Due to the Service’s seemingly-intense focus on notice after the post-1976 iteration of gift tax laws upon which we operate and plan today, as a remnant of Rev. Rul. 81-7 (which we will not cover here), many trusts are drafted to minimize the risk that the present interest requirement can be invalidated by a lack of notice. For this reason, many trusts impose a written notice requirement on the trustee of a trust when a Crummey power is created. It is important to note that none of the IRS guidance expressly requires written notice – it simply requires knowledge of the power as a necessary prerequisite to an unrestricted present interest (i.e., a lack of impediment to the exercise of the power). The written notification process is instead an attempt to prove knowledge of the power.

However, might the intense (albeit subconscious) focus on an unrestricted power be creating a power that is not truly immediate?