Gifts utilizing contingent beneficiary Crummey Powers

Case law has established the possibility that the annual gift tax exclusion can be used for gifts via Crummey Powers to contingent remainder beneficiaries under certain circumstances. The contingent beneficiaries must have an unrestricted right of withdrawal and a contingent remainder interest in the Trust. (i.e. The contingent beneficiary cannot only hold a “naked power” which is when the beneficiary only has a right of withdrawal and no other right in Trust property.) There can be no understanding between the donor and the beneficiaries that the beneficiaries will not exercise their rights of withdrawal. The contingent beneficiaries must actually receive notification of the gifts.

Using contingent beneficiaries increases the number of annual exclusions available to a donor in gifting to a Crummey Trust. The IRS has challenged and lost several court cases regarding contingent beneficiaries but has stated it will continue to challenge these gifts if they appear to be given merely for the purpose of increasing the number of annual exclusions. However, the IRS has also stated it will not challenge annual exclusions under Crummey powers for vested remaindermen and current income beneficiaries.
 

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