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

trust. If the beneficiary is a grandchild, the trust must be includible in the
beneficiary’s estate to obtain the GST annual exclusion for trust
contributions.
A Crummey trust can be used for a minor or for an adult beneficiary.
2. Distributions. The trustee, who should not be the donor, determines
when distributions are appropriate, subject to the terms of the trust
instrument. Distributions may be permitted under any distribution
standard and for any purposes.
The trust may, but need not, provide for mandatory distribution to the
beneficiary at a particular point in time, such as when the beneficiary
attains a certain age. Alternatively, the trust may last for the beneficiary’s
life. Upon the beneficiary’s death, the trust may specify how trust assets
are distributed.
3. Taxation
a. Gift Tax. Assuming that the donor does not retain any interest in
or power over the trust, the donor’s contribution to the Crummey
trust will be a completed gift.
The Crummey power makes contributions to the trust gifts of
present interests and therefore qualifies such gifts for the gift tax
annual exclusion (assuming the Crummey power is properly
drafted and administered). Crummey v. Comm’r, 397 F.2d 82 (9th
Cir. 1968).
The Crummey power is a general power of appointment. When
the power lapses, its lapse is treated as a release of the power to the
extent that the amount of the release exceeds in any year the
greater of (a) $5,000 or (b) five percent of the value of the trust
property subject to the release. Code § 2514(e). A release of a
general power of appointment is treated as a gift to the other trust
beneficiaries. Code § 2514(b). To prevent the lapse of the
Crummey power from being a taxable gift from the beneficiary,
the trust could give the beneficiary a testamentary power of
appointment sufficient to prevent the gift from being “complete”
for gift tax purposes. See, e.g., Pvt. Ltr. Rul. 9801025 (Sept. 30,
1997). However, in order for the testamentary power of
appointment to make the gift incomplete, the beneficiary must be
the sole beneficiary of the trust during the beneficiary’s life.
Alternatively, the trust could use “hanging powers,” which may
prevent the lapse from exceeding the five and five amount in any
year. (NOTE: The IRS has attempted to attack hanging powers in
the past.)
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