Back to the Future Interest: The Origin and Questionable Legal Basis of the Use of Crummey Withdrawal Powers to Obtain the Federal Gift Tax Annual Exclusion

Abstract

Although the future of the estate tax is uncertain, the federal gift tax and the federal gift tax annual exclusion survived recent Congressional action. In fact, recent changes to the Internal Revenue Code may increase the use of the annual exclusion in the short term.
The federal gift tax annual exclusion allows donors to give $11,000 per year to an unlimited number of donees free of gift tax. The exclusion is unavailable for gifts of “future interests,” including most gifts in trust. In order to make a gift in trust that fully qualifies for the annual exclusion, donees are frequently given temporary powers – called “Crummey powers” – to withdraw the gift to the trust.
Crummey powers are based on unjustifiable analogies to the federal income tax. In fact, Crummey powers are inconsistent with the language of the Internal Revenue Code, the Treasury Department’s regulations and United States Supreme Court precedent concerning the annual exclusion. Moreover, Crummey powers defeat the legislative intent behind the annual exclusion.
The law has become muddled in this area due to missteps by the IRS. Despite the potential for abuse, the IRS has never contested the fundamental validity of Crummey powers. Instead, the IRS accepted the basic premise behind Crummey powers and litigated side issues. The IRS’s agreement on the basic premises, however, precluded its success on the side issues.
The Treasury Department or Congress may effect an abrogation of Crummey powers. In the current political climate, however, they are unlikely to do so. Unless they do, the IRS will likely be forced to continue to accept the sham it sanctioned when it acquiesced in Crummey v. Commissioner.