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Tuesday, April 14, 2015

60 Crummey Withdrawal Beneficiaries Allowed

For many years, courts have recognized that gifts to a trust can qualify for the gift tax annual exclusion as “present interest” gifts if withdrawal powers are granted to beneficiaries.The IRS is hostile to persons being treated as a beneficiary for this purpose if they have no rights to income or principal nor vested rights as remaindermen. Nonetheless, the courts have recognized beneficiaries that are merely contingent remaindermen as having a substantial enough interest such that annual exclusion can be applied to gifts subject to withdrawal by them. For example, see Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991)

In a recent Tax Court case, a trust had as its beneficiaries 60 persons – all of the lineal descendants of the settlors and the spouses of those descendants.Property was funded into the trust in 2007, and all beneficiaries were granted withdrawal rights and notified of their withdrawal rights. Aside from satisfying the withdrawal rights that might be exercised, the trustees were given power to distribute in their discretion amounts of income and principal among one or more of the beneficiaries for health, education, maintenance, support and other purposes.

The Court granted a motion to treat the amounts subject to the withdrawal powers as present interest gifts for annual exclusion purposes.

This is the highest number of withdrawal power beneficiaries I have ever seen. Interestingly, the principal issue before the court did not relate to the number of beneficiaries nor the discretionary or contingent nature of their interests in the trust aside from their withdrawal rights. Instead, it focused on whether they had an enforceable right to withdraw the withdrawal amounts.

This was an issue because the initial resolution of disputes has to be submitted to arbitration before a panel consisting of three persons of the Orthodox Jewish faith. Such a panel in Hebrew is called a beth din. If a disputant does not like the results of the beth din, they could still go to court, but the trust has an in terrorem clause that would cut off the rights of the disputing beneficiary if he or she did that. So the IRS argued that the in terrorem clause effectively voided the withdrawal beneficiaries power to legally enforce his or her withdrawal powers – thus they were illusory and not a qualified present interest.

The flaw in this argument is that the beth din was still obligated to apply the provisions of the trust instrument and New York law. So since the beneficiaries had withdrawal rights under the trust and New York law the beth din could not willy-nilly disregard them – the rights were thus enforceable. The fact that they were enforceable by the beth din and not a court of law was not important to the Tax Court.

Mikel v. CIR, T.C. Memo 2015-64

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