Probate & Trust Law Section Conference Manual ... - Minnesota CLE

1. TAM 199941013. In Technical Advice Memorandum 199941013 (July 9,
1999), a grandmother prepaid tuition for two grandchildren by making
non-refundable payments directly to the educational institution. The
Internal Revenue Service (IRS) ruled that the non-refundable tuition
payments qualified for section 2503(e) treatment. However, section
2503(e) might not apply to prepayments that are refundable if the student
fails to attend, or drops out of, the particular school. Code § 2503(e)(2).
2. Private Letter Ruling 200602002. In Private Letter Ruling 200602002,
the donor prepaid tuition through grade 12 for six grandchildren. The
agreements provided that the tuition payments were nonrefundable and
would be forfeited in the event the respective grandchild ceases to attend
school. The tuition payments qualified under section 2503(e) and were
not generation-skipping transfers.
III.
Crummey Trusts. After taking advantage of the tuition exclusion, grandparents and
parents with large estates will want to use their gift tax annual exclusions to transfer
assets to children and grandchildren gift tax free.
A. Gift Tax Annual Exclusion. An individual may give $14,000 per donee each
year (for 2013) without incurring federal gift tax. Code § 2503(b)(2). If the
donor’s spouse elects to split gifts under section 2513, the donor and the spouse
may give a total of $28,000 per donee each year without incurring gift tax. The
gift tax annual exclusion was originally $10,000 and is adjusted for inflation
periodically in $1,000 increments. However, the gift tax annual exclusion does
not apply to gifts of future interests in property. An unrestricted right to the
immediate use, possession, or enjoyment of property or the income from property
is a present interest in property. Treas. Reg. § 25.2503-3(b). “Future interest”
includes interests or estates that are limited to commence in use, possession, or
enjoyment at some future date or time. Treas. Reg. § 25.2503-3(a).
B. Crummey Trusts for Single Beneficiary. A grandparent will generally establish
a separate Crummey Trust for each grandchild so that contributions to the trust
can qualify for the GST tax annual exclusion as well as the gift tax annual
exclusion. A parent may sometimes prefer to establish a separate Crummey Trust
for each child. If the parent wants to make certain that each child receives the
same pecuniary benefit, regardless of the cost of their education, separate trusts
are best.
1. In General. A donor can establish a trust for a single beneficiary, giving
the beneficiary a right to withdraw contributions to the trust when made
(“Crummey powers”), at least up to the amount of the gift tax annual
exclusion. See Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968).
Typically the beneficiary has a testamentary power of appointment over
the trust to prevent the lapse of the Crummey powers, to the extent the
lapse in any year exceeds the greater of $5,000 or five percent of the trust
assets each year, from being a completed gift from the beneficiary to the
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