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

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 beneficiaries,
the trust could use “hanging powers,” which may prevent the lapse
from exceeding the five and five amount in any year.
b. Estate Tax. Assuming that the donor does not retain any interest
in or power over the trust, the trust assets will not be included in
the donor’s estate. Therefore, the donor should not act as trustee.
If a beneficiary has a general testamentary power of appointment
over a portion of the trust, a portion of the trust assets will be
included in the beneficiary’s estate. Code § 2041(a)(2). Also, if a
beneficiary ever released a general power of appointment over the
trust property (e.g., because the lapse of a Crummey power
exceeded the five and five amount), a portion of the trust assets
will be included in the beneficiary’s estate. Id.
c. Generation-Skipping Transfer Tax. Contributions to the trust
will not qualify for the GST annual exclusion because there are
multiple trust beneficiaries. Code § 2642(c). Section
2642(c)(2)(A) requires that, in order to obtain a GST annual
exclusion for a transfer in trust, “during the life of such individual,
no portion of the corpus or income of the trust may be distributed
to (or for the benefit of) any person other than such individual.”
To the extent that a beneficiary has a Crummey power and the
lapse of the Crummey power results in a completed gift from the
beneficiary to the trust (i.e. the lapse in any year exceeds the
greater of $5,000 or five percent of the trust property), the
beneficiary becomes the transferor for GST tax purposes. Treas.
Reg. § 26.2652-1(a)(5), Example 5 provides:
Example 5. Effect of lapse of withdrawal right on identity
of transferor. T transfers $10,000 to a new trust providing
that the trust income is to be paid to T’s child, C, for C's
life and, on the death of C, the trust principal is to be paid
to T’s grandchild, GC. The trustee has discretion to
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