AALU WRMarketplace 14-04

Avoiding Inadvertent Taxable Gifts: Crummey Powers and Annual Exclusion Gifts to Trusts

Many individuals follow an annual gifting strategy that involves making gifts to trusts, including irrevocable life insurance trusts (“ILITs”), and rely on beneficiary withdrawal powers to avoid taxable gifts by qualifying the transfers as annual exclusion gifts.

For gifts to trusts to qualify for the annual gift tax exclusion, the beneficiaries must have a present interest in the gift. Properly structured and administered “Crummey” withdrawal powers can satisfy the present interest requirement, but must comply with several requirements to reduce the risk of unintended taxable gifts (by either the grantor or the power holder) and IRS scrutiny.

The IRS continues to review trust contributions and their qualification as annual exclusion gifts. Since achieving a favorable outcome on annual exclusion issues may require expensive litigation, take this opportunity to contact donors and trustees who recently made/received annual exclusion gifts to review these Crummey power requirements, to confirm past and future compliance, and to suggest corrective measures, if needed.

Learn more about this issue in the  AALU WRMarketplace Report 14-04, published January 30, 2014.