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in Drafting Trust Documents Protecting Against IRS Challenges to - - PowerPoint PPT Presentation

Mar 01, 2023 156 likes •408 views

Presenting a live 90-minute webinar with interactive Q&A Avoiding "Crummey Power" Mistakes in Drafting Trust Documents Protecting Against IRS Challenges to Gifts to Irrevocable Trusts TUESDAY, OCTOBER 4, 2016 1pm Eastern |

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Avoiding "Crummey Power" Mistakes in Drafting Trust Documents

Protecting Against IRS Challenges to Gifts to Irrevocable Trusts

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, OCTOBER 4, 2016

Presenting a live 90-minute webinar with interactive Q&A Christiana Lazo, Partner, McDermott Will & Emery, New York Lorraine F . New, George W. Gregory, Troy, Mich.

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Avoiding Crummey Power Mistakes in Drafting Trust Documents

Christiana M. Lazo McDermott Will & Emery LLP New York, New York

clazo@mwe.com

Lorraine F. New George W. Gregory PLLC Troy, Michigan

lorrainenew@ggregoryonline.com

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Introduction and Overview

  • Crummey v. Commissioner, 397 F.2d 83 (9th Cir. 1968)
  • Numerous court cases, Revenue Rulings, PLRs and TAMs

since, all of which have helped to flesh out “best practices”

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Introduction and Overview

  • What is at stake?
  • What is focus of likely IRS challenges?

– Who may hold the withdrawal power; – Time period during which the withdrawal power is exercisable; and – Required notice to powerholder

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Drafting Requirements in Trust Documents

  • Best practice: Include necessary provisions in the trust

instrument itself, but

  • Requirements may be satisfied in the contribution agreement

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Drafting Requirements in Trust Documents

  • Who may hold the withdrawal power?

– Multiple powerholders permitted

  • Donor may exclude on a transfer-by-transfer basis
  • But beware of “naked” powers

– Minor beneficiaries

  • Trust indenture (or transfer instrument) should expressly permit

exercise on behalf of minor

  • No impediment to guardian appointment

– Special considerations for generation-skipping transfer tax considerations

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Drafting Requirements in Trust Documents

  • Time Period During which Withdrawal Power is Exercisable

– Trust indenture (or transfer instrument) should specifically identify – Must be “reasonable” – May extend into a calendar year beyond the year of contribution

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Drafting Requirements in Trust Documents

  • Amount Over Which Power to Withdraw is Exercisable

– Potential income and transfer (estate, gift, generation-skipping ) tax consequences of withdrawal power

  • Consider limiting withdrawal power to “greater of $5,000 and 5%”

– Spouse as a withdrawal powerholder – Gift-Splitting Considerations

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Notice Requirements to Beneficiaries

  • Trust indenture at issue in Crummey v. Commissioner did not

include a procedure to notify a donee of a contribution over which the donee had a withdrawal right

  • However, IRS position is otherwise

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Notice Requirements to Beneficiaries

  • Form of notice

– Actual versus formal notice

  • Recipient of notice (and minor beneficiaries)
  • Timing of notice

– Advance waiver of notice

  • Curing past practices

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Additional Steps to Protect Against IRS Challenge

  • IRS position: Notice and Opportunity to Withdraw
  • Present Interest means Donee legally and technically capable
  • f immediately possessing and enjoying the gifted property

and has a reasonable opportunity to do so

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Additional Steps to Protect Against IRS Challenge: Crummey Notice Choices

  • None Necessary
  • Notice of prospective,

permanent, but revocable waiver of withdrawal rights

  • Notice,

acknowledgement and Waiver

  • Notice
  • Notice with

acknowledgement

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Additional Steps to Protect Against IRS Challenge: Time and Method of Notice

  • 2/3/4 days insufficient time

for withdrawal

  • Written
  • Verbal
  • Electronic
  • No implied understanding

Holland v. Commissioner TC Memo 1997-302

  • 30 days or more works

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Additional Steps to Protect Against IRS Challenge

  • Grandchildren and other contingent beneficiaries

– Cristofani 97 TC 74(1991) – Kohlsaat v. Comm. TC Memo 1997-212 – AOD 1992-9, 1996-10 – TAM 9628004 – Holland v. Comm. TC Memo 1997-302 – Charity: Commissioner v Estate of Sternberger 384 US 187 (1955) – Estate of Clopton v. Comm. 93TC 275 (1989)

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Additional Steps to Protect Against IRS Challenge

  • Waiver of Withdrawal Right

– IRS may not buy- see TAM 9532001 (1995) – Withdrawal right is a general power of appt. and not a lapse under IRC Section 2514(e) – Preference is to let rights just lapse, subject to a hanging power for the amount in excess of the 5 or 5 exclusion.

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Hanging Powers

  • Withdrawal rights lapse only for $5000
  • Amount over $5000 continues as withdrawal right until

exercised when it can lapse without gift tax consequences

  • Don’t make hanging power contingent on action by IRS or

courts - TAM 8901004

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Hanging Powers

  • Ways to Deal with Hanging Power Problem

– Make gifts that do not exceed $5000 – Make the beneficiary the sole beneficiary – Give the primary beneficiary a general power of appointment, making the hanging power an incomplete transfer and not a completed gift

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Hanging Powers

  • Subsequent Hanging Power Notice

– As Trustee, I have previously advised you may also have rights of withdrawal with respect to prior contributions to the trust. If you should ever want to exercise those rights, I will provide you with the total amount withdrawable at that time. In order to exercise any right of withdrawal, I must be given written notice.

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Conclusion and Summary

  • Recent IRS Attacks

– IRS has checked whether Donor paid insurance premiums directly so no money in trust for withdrawal – IRS questions assets in trust to see if withdrawals by all beneficiaries are possible – IRS questions restrictive language to get gift – Greenbook proposals to limit total Crummeys

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  • Rules to Follow

– No express or implied agreement – Withdrawal period at least 30 days – Just let it lapse! – Don’t waive as to future contributions – Have liquidity to fulfill potential distributions – If possible, don’t pay premiums directly – Send notices with proof of mailing date

Conclusion and Summary

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Conclusion and Summary

  • More Rules to Follow

– No Naked Crummeys- (no substantial econ. interest) – Consider avoiding withdrawal times at end of calendar year – Don’t set up multiple Crummey trusts for same beneficiaries – Consider gifting less than the annual exclusion – Avoid restrictive language to get gift

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