Avoid Crummey Mistakes: Take Care in Structuring Trust Withdrawal Powers

In Crummey v. Commissioner, 397 F.2d 82, 88 (9th Cir. 1968), the Ninth Circuit held that a gift in trust qualified for the gift tax annual exclusion because the trust’s beneficiaries had the power to withdraw a portion of the gifted assets. Since then, including such withdrawal powers in trusts has become standard operating procedure for estate planners. Despite their advantages, such “Crummey powers” complicate trust drafting and can cause tax problems that extend beyond eligibility for the annual exclusion. Common mistakes include (i) conditioning Crummey powers on the beneficiaries’ receipt of written notice; (ii) unclear descriptions of the powers; and (iii) failing to address adverse tax consequences caused by releases of such powers.