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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 | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Christiana Lazo, Partner, McDermott Will & Emery , New York Lorraine F . New, George W. Gregory , Troy, Mich. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.

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Avoiding Crummey Power Mistakes in Drafting Trust Documents Lorraine F. New Christiana M. Lazo George W. Gregory PLLC McDermott Will & Emery LLP Troy, Michigan New York, New York lorrainenew@ggregoryonline.com clazo@mwe.com

Introduction and Overview  Crummey v. Commissioner , 397 F.2d 83 (9 th Cir. 1968)  Numerous court cases, Revenue Rulings, PLRs and TAMs since, all of which have helped to flesh out “best practices” 6

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 7

Drafting Requirements in Trust Documents  Best practice: Include necessary provisions in the trust instrument itself, but  Requirements may be satisfied in the contribution agreement 8

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 9

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 10

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 11

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 12

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 13

Additional Steps to Protect Against IRS Challenge  IRS position: Notice and Opportunity to Withdraw  Present Interest means Donee legally and technically capable of immediately possessing and enjoying the gifted property and has a reasonable opportunity to do so 14

Additional Steps to Protect Against IRS Challenge: Crummey Notice Choices  Notice, acknowledgement and  None Necessary Waiver  Notice of prospective,  Notice permanent, but revocable waiver of withdrawal rights  Notice with acknowledgement 15

Additional Steps to Protect Against IRS Challenge : Time and Method of Notice  2/3/4 days insufficient time  30 days or more works for withdrawal  Written  Verbal  Electronic  No implied understanding Holland v. Commissioner TC Memo 1997-302 16

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) 17

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. 18

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 19

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 20

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. 21

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 22

Conclusion and Summary  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 23

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 24