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

distribute principal for GC’s benefit during C’s lifetime. C
has a right to withdraw $10,000 from the trust for a 60-day
period following the transfer. Thereafter, the power lapses.
C does not exercise the withdrawal right. The transfer by T
is subject to Federal gift tax because a gift tax is imposed
under section 2501(a) (without regard to exemptions,
exclusions, deductions, and credits) and, thus, T is treated
as having transferred the entire $10,000 to the trust. On the
lapse of the withdrawal right, C becomes a transferor to the
extent C is treated as having made a completed transfer for
purposes of chapter 12. Therefore, except to the extent that
the amount with respect to which the power of withdrawal
lapses exceeds the greater of $5,000 or 5% of the value of
the trust property, T remains the transferor of the trust
property for purposes of chapter 13.
To the extent the donor is the transferor for GST tax purposes, if
the trust is a skip person, GST exemption would automatically be
allocated to transfers exceeding the annual exclusion unless the
donor elects out of automatic exclusion. Code § 2632(b). If the
trust is not a skip person, the donor could allocate GST exemption
to transfers to the trust.
d. Income Tax. Assuming that the trust is not a grantor trust, the
beneficiaries may be treated as the substantial owners of the trust
for income tax purposes under section 678. The beneficiaries will
be treated as the owners under section 678 to the extent they have
outstanding Crummey powers over the trust.
After the lapse of a Crummey power, the Service takes the position
that the lapse is equivalent to a release, and that therefore Section
678 continues to apply. See, e.g., Pvt. Ltr. Rul. 9034004 (May 17,
1990). Some attorneys take the position that a lapse is not
equivalent to a release, and therefore section 678 ceases to apply
after the lapse.
Under some circumstances the spray Crummey trust could be a
grantor trust with respect to income and/or principal. If the spray
Crummey trust is a grantor trust, section 678 would not apply to
tax trust income to the beneficiaries. Code § 678(b). There is an
argument, however, that section 678(b) does not prevent
application of section 678 to capital gains.
To the extent the spray Crummey trust is not a grantor trust and
section 678 does not apply, the trust will be treated as a separate
taxpayer and taxed under the normal fiduciary income tax rules.
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