This post was originally published on Forbes May 11, 2015
Apart from directing mandatory distributions in response to withdrawal demands, the trust empowered the trustees, “in their sole and absolute discretion,” to make discretionary distributions during the term of the trust. Such distributions could be made for the health, education, maintenance, or support of any beneficiary or family member. Such distributions could also be made, in the trustees' “absolute and unreviewable discretion,” to assist a beneficiary in defraying “reasonable wedding costs, *** purchasing a primary residence, or *** entering a trade or profession.” In exercising this discretion the trustees were empowered to distribute “at any time and from time to time, any amount of income or principal (even to the extent of all).” The declaration specifies that “[t]he judgment of the Trustees as to the amounts of such payments and the advisability thereof shall be final and conclusive” upon all beneficiaries and other persons interested in the trust.
Faith-based arbitration clauses are especially well suited to inheritance disputes. And not only are they legally enforceable, they’re growing in popularity. Hundreds of Christian denominations and organizations offer this kind of dispute resolution service. Peacemaker Ministries, founded in 1982, is reportedly the largest. The Jewish arbitration system is perhaps the most well organized, with branches of standing battei din all over the country. Headquartered in New York and founded in 1960, the Beth Din of America is the most prominent. Although less organized and widespread than Jewish and Christian dispute resolution services, Islamic organizations also offer mediation and arbitration services ...
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.
IRS has acquiesced in Crummey for years, but now claims the in terrorem frustrates any demanding beneficiary from pursing their rights, so the demand right is illusory. No, says Judge Lauber, the Beit Din remains and isn’t covered by the in terrorem. Anyway, reading the in terrorem, it applies only when someone challenges the trustees when they give away, not when they refuse.