Crummey Powers - Back to Arm Breaking Threats

Originally Published on forbes.com on March 9th,2012

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There is a story, I recall, to the effect that when Japanese Premier Shigemitsu hesitated a bit at the surrender ceremony on board the USS Missouri on September 2, 1945, General MacArthur told an aide to “Show him where to sign.” That reflects the general attitude toward beneficiaries being asked to acknowledge a notification about a Crummey power. 

A kind of running joke among estate planners is what would happen if somebody’s kid ever had the temerity to exercise a Crummey power.  “Here kid, sign this.” “I didn’t say to read it, I said to sign it.” From there you move on to threats of arm breaking.  A “Crummey power” is a right that a beneficiary has to withdraw an amount from a trust for a short period of time right after the amount is added to the trust .  The reason Crummey powers were invented was because a gift to qualify for the annual exclusion of $13,000 has to be of a present interest.

  The exact definition of a present interest is a little complicated, but it is clear that the possiblity of getting  discretionary distribtutions from a Florida dynasty trust with a term of 360 years is not a present interest.  So when grandad puts money into that trust there is a clause in the trust instrument that says grandkid can ask for the $13,000 within thirty or sixty days or something  like that and the trustee has to fork it over.  If the trustees want to be thorough, they will get an acknowledgment from the beneficiary.  I have been at this for over thirty years and I have never even heard a story about a Crummey power being exercised.

Based on something that just came from the IRS Chief Counsel some planners must have gotten worried about some gutsy beneficiary really wanting that 13 grand right way.  Here is what they came up with:

The trustee, Child A, has absolute and unreviewable discretion in administering the Trust for the benefit of the Donors’ children, other lineal descendants, and their spouses (beneficial term interests). Income and principal may be distributed at any time for a beneficiary’s health, education, maintenance, support, wedding costs, purchase of a primary residence or business, or for any other purpose. Income and principal may also be distributed to a charitable organization

Nothing unusual there. Then we get to the Crummey power:

Each beneficiary may withdraw an amount of property (based on the § 2503(b) annual exclusion amount) in any year in which a transfer is made to the Trust. However, this may be voided by the trustee for additions made to the Trust.

So apparently if a beneficiary grabs the 13 grand once, the trustee can void the power for future transfers.

Then there is this other provision:

The Trust provides that the construction, validity, and administration of the Trust are to be determined by State law, but provision is made for Other Forum Rules. Specifically, all questions and disputes concerning the Trust must be submitted to the Other Forum that is charged with enforcing the Trust. A beneficiary filing or participating in a civil proceeding to enforce the Trust will be excluded from any further participation in the Trust.

The Chief Counsel’s office had a real problem with that one:

Under the terms of the Trust in this case, a beneficiary cannot enforce his withdrawal right in a State court. He may only press his demand before an Other Forum and be subject to the Other Forum’s Rules. Notwithstanding any provisions in the Trust to the contrary, the Other Forum will not recognize State or federal law. If the beneficiary proceeds to a State court, his existing right to income and/or principal for his health, education, maintenance and support will immediately terminate. He will not receive any income or principal for his marriage, to buy a home or business, to enter a trade, or for any other purpose. He will not have withdrawal rights in the future, and his contingent inheritance rights will be extinguished. Thus, a beneficiary faces dire consequences if he seeks legal redress. As a practical matter, a beneficiary is foreclosed from enforcing his withdrawal right in a State court of law or equity.

Exercise that Crummey power and try to make it stick and you are banished and join the 99%.  A more dire threat than arm breaking ?  Only it doesn’t work:

Withdrawal rights such as these are not the legally enforceable rights necessary to constitute a present interest. Because the threat of severe economic punishment looms over any beneficiary contemplating a civil enforcement suit, the withdrawal rights are illusory.

 Well it seemed like a good idea, I guess, like sinking all those battleships in a surprise attack, but it just did not work out.  The MacArthur story made me think about what was the best fictional VJ Day scene ever filmed and this is what I came up with:

If you read Ambrose’s book, you can tell the scene is fictional, but that doesn’t matter.  It should have happened that way.

You can follow me on twitter @peterreillycpa.