income, gift, and estate tax aspects of crummey powers ... · income, gift, and estate tax aspects...

PROBATE & PROPERTY � JANUARY/FEBRUARY 2004 37

The need for Crummey withdrawal right trusts, suchas irrevocable life insurance trusts or Code § 2642(c)grandchild trusts, among other things, has not been

diminished by the Economic Growth and Tax Relief andReconciliation Act of 2001, Pub. L. No. 107–16, 115 Stat. 38(2001) (“2001 Tax Act”). The uncertainty surrounding thepermanency of the repeal of federal estate taxes and gener-ation-skipping transfer (GST) taxes, because of the Act’ssunset provisions, which take effect January 1, 2011, andreinstate the pre-2001 Tax Act transfer tax regime, under-scores the need for clients with estates greater than $1 mil-lion to consider the use of irrevocable trusts as a means oftransferring appreciating property or life insurance to thegrantor’s descendants and removing it from inclusion inthe grantor’s gross estate. Because the gift tax applicableexclusion amount remains frozen at the $1 million level(even if the estate and GST tax is permanently repealed),grantors will want to use their available annual exclusionamount under Code § 2503(b) before using their $1 milliongift tax applicable exclusion amount. Thus, the Crummeytrust with its corresponding right of withdrawal granted tothe beneficiaries will serve as a useful tool when thegrantor wants to preserve his or her $1 million gift tax

Sebastian V. Grassi Jr. is a partner in the Troy, Michiganlaw firm of Grassi & Toering, PLC. This article is adaptedfrom Grassi, A Practical Guide to Drafting Irrevocable LifeInsurance Trusts (ALI/ABA 2003).

Income, Gift, and Estate Tax Aspectsof Crummey Powers After the

2001 Tax Act, Part 1By Sebastian V. Grassi Jr.

applicable exclusion amount. A Crummey withdrawalright is simple in concept but complex in terms of its taximplications.

This article is divided into two parts. Part 1 discussesvarious common income, gift, and estate tax issues that anattorney may encounter, or want to consider, when draft-ing Crummey powers under the 2001 Tax Act. Part 2, whichwill appear in the March/April 2004 issue, will discuss thegeneration-skipping transfer tax aspects of Crummey pow-ers under the 2001 Tax Act.

Income Tax Aspects ofa Crummey Withdrawal Right

An irrevocable trust is a separate taxpayer, unless (1) thetrust is a defective grantor trust under Code §§ 671–677 (inwhich case the grantor will be taxed on the trust’s income)or (2) a nongrantor (such as a Crummey withdrawal rightbeneficiary) is treated as the owner of the trust for income

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tax purposes under Code § 678 (inwhich case the nongrantor will betaxed on the trust’s income).

Under Code § 678, a person otherthan the grantor is treated as theowner (for income tax purposes) ofany portion of a trust for which suchperson (such as a Crummey withdraw-al right beneficiary) either (1) has apower exercisable solely by himself tovest the corpus or the income from thecorpus in himself (such as a benefici-ary with a Crummey withdrawal right),or (2) has previously partially releasedor modified such a power and after-ward retains sufficient control, whichwould make the grantor taxable as theowner under the grantor trust rules. Ifthe grantor holds a power under Code§§ 673 through 677 and the beneficiaryholds a Code § 678 power (such as aCrummey withdrawal right) over thesame income, the beneficiary’s poweris disregarded, and the grantor is taxedas the owner of the trust income. TheCode is, however, unclear concerningthe grantor being taxed as the ownerof the principal, because Code § 678(b)refers only to “income,” whereas Code§ 678(a)(1) refers to a beneficiary’spower to vest “corpus or the incometherefrom.” Several commentators areof the opinion that this incongruency isa drafting error, and that the grantortrumps the beneficiary as to bothincome and corpus. In several PLRsthe IRS has taken the position that thegrantor is treated as the owner of thecorpus (whenever possible) despite theexistence of a Code § 678 power (ofwithdrawal) held by a beneficiary.PLRs 9321050, 9309023, 9140127,8308033, 8326074, 8142061, 8103074,and 7909031.

An additional incongruency isfound in the language of Code§ 678(a)(2) itself, which refers to a ben-eficiary who has “previously partiallyreleased or otherwise modified such apower and after the release or modifica-tion retains such control as would,within the principles of Code §§ 671 to677, inclusive, subject grantor of a trustto treatment as the owner thereof.”(Emphasis added.) The Code refers toa “release,” and a release connotes anaffirmative act on the part of the hold-

er of the power. A lapse, on the otherhand, requires no action by the holderof the power. Interestingly, Congressfound it necessary to expressly statethat a lapse of a general power ofappointment is a “release” for estateand gift tax purposes. The failure ofCongress, however, to make a similarstatement for income tax purposesappears to be an indication thatCongress did not intend to equate alapse with a release for the grantortrust rules.

Gift Tax Aspects of a CrummeyWithdrawal Right

Annual Exclusion Gifts

For a gift to qualify as a gift of a pres-ent interest that is eligible for the annu-al gift tax exclusion, the donee musthave the unrestricted right to the

immediate use, possession, orenjoyment of the property or theincome from the property. Treas.Reg. § 25.2503–3(b). A Crummey with-drawal right over a contribution to atrust constitutes an unrestricted rightto the immediate use, possession, orenjoyment of the contributed propertyand converts what would otherwise bea gift of a future interest into a gift of apresent interest that qualifies for theannual gift tax exclusion underCode § 2503(b). Crummey v.Commissioner, 397 F.2d 82 (9th Cir.1968); Rev. Rul. 73–405, 1973–2 C.B.321. Over the years the IRS hasattempted to place limits on the expan-sion of the class of beneficiaries eligibleto hold Crummey withdrawal rights.Generally, the IRS officially recognizesonly Crummey withdrawal right bene-ficiaries who hold a current income

interest or vested remainder interest inthe trust, provided there is no preexist-ing understanding between thegrantor and the beneficiaries concern-ing the non-exercise of their withdraw-al rights. TAM 9731004; PLR 9030005;Rev. Rul. 85–24, 1985–1 C.B. 329; andRev. Rul. 81–7, 1981–1 C.B. 474. But seeEstate of Cristofani v. Commissioner, 97T.C. 74 (1991), AOD 1996–010; Estate ofKohlsaat v. Commissioner, 73 T.C.M.(CCH) 2732 (1997); Estate of Holland v.Commissioner, 73 T.C.M. (CCH) 3236(1997) (in which the Tax Court implic-itly rejected the IRS’s “prearrangedunderstanding” test and permittedCrummey withdrawal rights to qualifyfor the gift tax annual exclusion whenthe beneficiaries had discussed indetail the purpose of the trust andtheir desire to not exercise their rightof withdrawal).

The IRS will not issue advance rul-ings concerning the availability of theannual gift tax exclusion involvingirrevocable life insurance trusts withCrummey withdrawal rights. Rev. Proc.82–22, 1982–1 C.B. 469.

A Crummey withdrawal right grant-ed to a spouse is a nondeductible ter-minable interest and does not qualifyfor the gift tax marital deduction(although the withdrawal right mayqualify for the annual gift taxexclusion under Code § 2503(b)).Code § 2523(b). If the donee-spouse isnot a U.S. citizen the annual gift taxexclusion amount available to thedonor-spouse (concerning presentinterest gifts) to a non-U.S. citizendonee-spouse is, however, increasedfrom $10,000 (indexed for inflation) to$100,000 (indexed for inflation) per cal-endar year. Code § 2513(i). There is nogift tax marital deduction available forgifts to the non-U.S. citizen spouse.

A grantor’s irrevocable contributionto a trust on December 31 is a complet-ed gift as of that date (for gift tax pur-poses), even though the beneficiarydoes not receive notice of the contribu-tion until several days later and thebeneficiary’s Crummey withdrawalright does not expire until 30 daysthereafter. Rev. Rul. 83–108, 1983–2C.B. 167. If the grantor dies shortlyafter delivery of a gift check to the



trustee, the gift check will be consid-ered a completed gift when it isdeposited, cashed against availablefunds, or presented for payment in thecalendar year for which completed gifttreatment is sought, if certain condi-tions are met. See Rev. Rul. 96–56,1996–2 C.B. 161; see also Estate ofMetzger v. Commissioner, 100 T.C. 204(1993), aff’d, 38 F.2d 118 (4th Cir. 1994).

Gift Splitting by Donor

Gift splitting under Code § 2513, whenused with a hanging withdrawalpower or with trust beneficiaries hav-ing separate trust shares coupled withtestamentary powers of appointment,permits the grantor to make annualgifts to a Crummey trust that are twicethe amount of the grantor’s availableannual gift tax exclusion amount. Giftsplitting is available to the grantor if(1) the spouse is a resident of theUnited States or a U.S. citizen, (2) thespouse is married to the grantor at thetime of the gift, and (3) the spousedoes not remarry during the remain-der of the calendar year. Gift splittingis particularly helpful in large premi-um cases. A donor cannot elect giftsplitting for gifts to his or her spouse;in other words, a donee spouse cannotelect to split gifts to himself or herself.Code § 2513(a)(1). If the donor trans-fers property in part to his spouse andin part to third parties, the election tosplit such a gift by the donee spouse iseffective only “with respect to the interesttransferred to third parties only insofar assuch interest is ascertainable at the time ofthe gift and hence severable from the inter-est transferred to [the donee] spouse.”Treas. Reg. § 25.2513–1(b)(4) (emphasisadded). If the donee (consenting)spouse has an annuity, life estate,remainder interest, or other deter-minable interest, the third parties’interests would be ascertainable andwould be eligible for gift-splitting.When the donee (consenting) spouseand other beneficiaries have Crummeywithdrawal rights over the giftedproperty, the amount subject to with-drawal by the other beneficiarieswould be ascertainable and thus eligi-ble for gift splitting. See PLRs 8044080,8112087, 8138012, 8138171, 8138170,

8143045, 200130030. The amount sub-ject to withdrawal by the donee (con-senting) spouse, however, would notbe eligible for gift splitting. If thedonee (consenting) spouse does nothave a Crummey withdrawal right overthe gift property but does have a gen-eral power of appointment over all thegift property, the gift cannot be split.Treas. Reg. § 25.2513–1(b)(3). If the giftis not subject to withdrawal rights andthe trust is a common “pot” trust fromwhich the donee (consenting) spouseand the other beneficiaries may allreceive distributions, the gift cannot besplit because there are no readily ascer-tainable interests. See Rev. Rul. 56–439,1956–2 C.B. 605; Kass v. Commissioner,16 T.C.M. (CCH) 1035 (1957); andWang v. Commissioner, 31 T.C.M. (CCH)719 (1972). This is because the doneespouse’s and the other beneficiaries’interests cannot be ascertained. If the

trustee is directed (that is, “shall” incontrast to “may”) to make distribu-tions under an ascertainable standard(for example, for the donee spouse’shealth, education, support, and main-tenance), the value of the third party(nonspouse) beneficiaries’ interestsshould be ascertainable. See TAM9419007; Estate of Regester v.Commissioner, 83. T.C. 1 (1984); Rev.Rul. 79–327, 1979–2 C.B. 342 (whichrelate to taxable gifts upon the exerciseof a limited power of appointmentover a trust with ascertainable stan-dards). In such an instance, that por-tion of the gift could be split with thedonee (consenting) spouse. Theamount of the gift that may be split isthe value of the property transferredby the donor less the donee (consent-

ing) spouse’s ascertainable interest inthe property, which is a factual deter-mination. See Falk v. Commissioner, 24T.C.M. (CCH) 86 (1965).

Merely consenting to split giftsmade in trust with the donorspouse does not make the donee (con-senting) spouse, who is also a trustbeneficiary, a transferor for purposesof the retained interest rules ofCode §§ 2035–2038. Code § 2513(a)(1);PLR 200113030. Therefore, to avoid theCode § 2036 trap inherent when aCrummey trust income beneficiarytransfers money to a Crummey trust(such as transfers by the grantor andthe grantor’s spouse, who is also aCrummey trust beneficiary), only thegrantor should make gifts to theCrummey trust, and any gifts of thegrantor in excess of the Code § 2503(b)amount should be split with thespouse under Code § 2513.

Gift splitting is not appropriatewhen transferring an existing lifeinsurance policy into a generation-skipping Crummey trust. If the transfer-or-grantor dies within three years ofthe transfer, the policy proceeds will beincluded in his or her estate underCode § 2035 (thus changing the identi-ty of the transferor for GST tax purpos-es) and the spouse’s previously allocat-ed GST exemption will be lost andwasted, resulting in an inclusion ratioof .50 (instead of 0). The betterapproach is not to gift split and insteadto have the transferor-grantor allocatehis or her GST exemption to the trustat the time of the initial transfer of thelife insurance policy.

The amount available for withdraw-al by a beneficiary should not dependon the donor spouse’s election to splitthe gift. PLR 8022048. Rather, theamount available for withdrawalshould be based on the assumption thata married donor’s spouse will elect tosplit the gift amount, whether or not theelection is made. PLR 8044080.

Beneficiary’s Lapse of a CrummeyWithdrawal Right

As previously mentioned, Crummeywithdrawal powers in an irrevocabletrust convert a future interest giftinto a present interest to qualify

Gift splitting is notappropriate when

transferring anexisting life insurance

policy into ageneration-skipping

Crummey trust.

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for the annual gift tax exclusion underCode § 2503(b). A Crummey withdraw-al right is a general power of appoint-ment. Code §§ 2514 and 2041. Extremecare must be used when insertingCrummey withdrawal powers in anamount greater than $5,000 or 5%of the value of the trust assets.Code § 2514(b) indicates that the exer-cise or release of a general power ofappointment will be treated as a trans-fer by the individual who released thepower. Under Code § 2514(e) alapse of a power of appointment isconsidered a release. A specificexception to this rule is set forth underCode §§ 2514(e)(1) and (2), which statethat the lapse of a power (and not arelease or a waiver of the power) notexceeding $5,000 or 5% of the value ofthe assets out of which the power canbe satisfied will not be treated as atransfer. What this means is that alapse of a Crummey withdrawal rightin excess of the “5 and 5” limitationwill be treated as a transfer to the othertrust beneficiaries by the Crummeywithdrawal beneficiary. A lapsed with-drawal right within the “5 and 5” lim-its will continue to be treated as atransfer by the donor. A lapse in excessof the “5 and 5” statutory protectionamount can cause disastrous estate,gift, and GST tax consequences. Forexample, if a trust was establishedwith an initial gift contribution of$11,000, and the spouse was the onlyCrummey withdrawal right beneficiaryand was given a $11,000 withdrawalright that lapsed, the spouse would bedeemed to be the transferor of theamount of the withdrawal right inexcess of $5,000, to wit, $6,000. In thisexample the spouse would be thedeemed transferor of 55% of the trustassets ($6,000 excess ÷ $11,000 trustvalue) and because the spouse held alife interest in the trust, 55% of thetrust assets would be includable in thespouse’s estate for federal estate taxpurposes. Treas. Reg. § 20.2041–3(d)(4).Furthermore, the spouse would also bea transferor for GST purposes over the$6,000 and the grantor’s previouslyallocated GST tax exemption would beineffective and wasted. This wouldrequire the spouse to allocate $6,000 ofhis or her GST tax exemption to main-

tain a zero inclusion ratio. Treas.Reg. § 26.2652–1(a)(5), Example 5.Because a lapse in excess of the “5 and5” amount constitutes a taxable releaseby the holder of the power, it is usuallybest to limit a beneficiary’s right ofwithdrawal amount to the lesser of (1)the gift contribution amount or (2) thegreater of the “5 and 5” amount. Thiswill ensure that when the withdrawalright lapses it will fall within the safeharbor amount of Code § 2514(e).Without such a limitation on theamount of the withdrawal right, thelapse of the withdrawal right in excessof the “5 and 5” amount (absent ahanging right of withdrawal or thebeneficiary having a separate trustshare and holding a testamentarypower of appointment over theamount of the withdrawal rightin excess of “5 and 5” (Treas.Reg. § 25.2511–2(b) and PLR 9030005))will constitute both a taxable releaseunder Code § 2514(b) and an immedi-ate gift of a future interest to the otherCrummey trust beneficiaries. When thebeneficiary dies, however, the assetssubject to the taxable release that thebeneficiary retained a power ofappointment over (even a testamentarylimited power of appointment) will beincludable in the beneficiary’s grossestate. Code §§ 2038 and 2041(a)(2).

There are two ways to deal with thetaxable release and gift over problem.The first is to establish initially sepa-rate trust shares for each Crummeytrust beneficiary and give the benefici-ary a testamentary limited power ofappointment over his or her trustshare or over the amount in excess ofthe “5 and 5” amount. This will pre-vent the lapsed amount in excess ofthe “5 and 5” limitation from being acompleted gift to the other trust bene-ficiaries. Treas. Reg. § 25.2511–2(b);PLR 9030005. But the separate trustshare coupled with a testamentary lim-ited power of appointment will notavoid the taxable release problem ofCode § 2514(e). Consequently, whenthe beneficiary dies, the assets overwhich the beneficiary retained a testa-mentary limited power of appoint-ment (that is, the amounts in excess ofthe “5 and 5” limitation) will beincluded in the beneficiary’s gross

estate under Code § 2041(a)(2). Inaddition, because the beneficiary hasa retained interest in the separatetrust, all or a portion of the value ofthe trust share will be included in thebeneficiary’s gross estate upon his orher death. Code § 2036(a); Treas.Reg. §§ 20.2041–3(d)(4). The effect ofcumulative taxable releases with aretained interest by the beneficiarymay result in all (or a significantportion) of the beneficiary’s separatetrust share being included inhis or her gross estate. Treas.Reg. § 20.2041–3(d)(5). Generally, thisapproach will work best in Crummeytrusts in which (1) the grantor’s spouseis not a beneficiary, (2) the Crummeytrust is not designed to be a long-termgeneration skipping dynasty trust, and(3) the beneficiary’s estate would mostlikely incur little or no federal estate tax(because of its modest size) if the bene-ficiary were to die before the termina-tion of his or her interest in theCrummey trust. The second way is toallow the Crummey withdrawal right tocontinue with regard to any amount inexcess of the “5 and 5” limitation. Thisis known as a hanging Crummey power(or hanging right of withdrawal).

Although the IRS has not favorablyruled on the use of hanging Crummeypowers, the one ruling on this issueseems to suggest that if the hangingpower is not drafted as a conditionsubsequent, it should be okay. PLR8901004. A spouse should never begiven a hanging Crummey power in ageneration-skipping trust because thespouse’s power may be deemed to cre-ate an estate tax inclusion period(ETIP), which will prevent the grantorfrom allocating his or her GST exemp-tion until the close of the ETIP.

The purpose of a hanging Crummeypower is twofold: first, to permit largertrust contribution amounts that qualifyfor the annual gift tax exclusionamount, and, second, to avoid adverseestate and gift tax consequences underCode §§ 2514(b) and 2036(a) to thetrust beneficiaries who hold Crummeywithdrawal rights. This is achieved byhaving the beneficiary’s withdrawalright be a cumulative power of withdrawal that lapses everycalendar year in the amount specified

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in Code § 2514(e)(1) and (2). If a bene-ficiary dies while possessing a hangingpower that has not fully lapsed, thevalue of the unlapsed hanging powerwill be included in the beneficiary’sgross estate. Code § 2041(a)(2). Thebeneficiary will also become the (new)“transferor” for GST purposes, and thebeneficiary’s executor may need toallocate GST tax exemption to theincluded amount. Fortunately, thereare no gift tax consequences to a bene-ficiary while he or she holds aCrummey withdrawal right that hasnot yet lapsed.

Beneficiary’s Waiver or Release of aCrummey Withdrawal Right

Because a Crummey withdrawal rightis a general power of appointment, abeneficiary’s waiver of the right ofwithdrawal constitutes a taxablerelease (and not a lapse) of a generalpower of appointment and constitutesa taxable gift of a future interest to theother trust beneficiaries. To avoid thisadverse tax consequence the benefici-ary should not waive the right to with-draw the trust contribution; rather, thebeneficiary should merely permit theright of withdrawal to lapse. Also, alapse of a beneficiary’s Crummey with-drawal right in excess of the “5 and 5”amount constitutes a taxable release ofa general power of appointment andconstitutes a taxable gift of a futureinterest to the other trust beneficiaries.To avoid this adverse tax consequencethe beneficiary’s right of withdrawalshould either be limited to the “5 and5” amount or be subject to continuinglapse under a hanging power of with-drawal that lapses annually at the rateof the “5 and 5” amount.

Beneficiary’s Annual Limit on “5 and 5” Safe Harbor Lapses

Rev. Rul. 85–88, 1985–2 C.B. 202, holdsthat only one “5 and 5” safe harborlapse is permitted per calendar yearper donee for all powers of withdraw-al available to that donee during theyear. Multiple withdrawal powersheld by the same donee over the sameor different trusts must be aggregatedto determine whether or not they vio-late the “5 and 5” safe harbor amount.See also G.C.M. 39371 (1985).

Estate Tax Aspects of aCrummey Withdrawal Right

Retained Life Estate by Grantor

If the grantor is a beneficiary of theCrummey trust, a retained interest inthe gifted property (for example, thegrantor’s beneficial interest in theCrummey trust or the grantor’s right tovote [directly or indirectly] shares of acontrolled corporation that the grantorhas gifted to the Crummey trust) willresult in inclusion of the trust propertyin his or her estate. Code § 2036includes in a decedent’s estate any pre-viously transferred property (for lessthan full and adequate considerationin money or money’s worth) in whichthe decedent retains for his or her life-time the use or enjoyment of theincome and/or corpus of the trans-ferred property. Therefore, the grantorof the Crummey trust should not be abeneficiary of the trust. The rules ofCode § 2036 apply both to the grantorand the Crummey trust beneficiaries.For example, if there is a taxablerelease of a Crummey withdrawalpower and the beneficiary causing therelease retains an income-for-life inter-est in the trust (or an interest that isotherwise ascertainable), the benefici-ary has transferred property to thetrust (to wit, the property subject to thetaxable release) and has retained aninterest in the released property forpurposes of Code § 2036(a). In thisinstance the beneficiary is also a“grantor” of the Crummey trust and aportion (if not all) of the trustestate may be included in the benefi-ciary’s gross estate. See Treas.Reg. § 20.2041–3(d)(4). If the grantor’sspouse is a beneficiary of the Crummeytrust, it is important that the spousenot make gift contributions to the trust(other than consenting to the splittingof gifts made by the grantor).

Deceased Beneficiary’s Lapse of aCrummey Withdrawal Right

If a beneficiary dies after his or herCrummey withdrawal right haslapsed within the “5 and 5” limitsimposed by Code §§ 2514(e) and2041(b)(2), the lapsed amount is notincluded in the beneficiary’s estate

because the lapse does not constitutea taxable release of the power.Code §§ 2041(a)(2) and (b)(2).

Deceased Beneficiary’s UnlapsedCrummey Withdrawal Right

Although the termination of aCrummey withdrawal right during thepower holder’s lifetime may not be ataxable release if the right of with-drawal (or rate of lapse under a hang-ing right of withdrawal) is limitedunder the “5 and 5” safe harbor rules ofCode §§ 2514(e) and 2041(b)(2), if thepower holder dies before the termina-tion (that is, lapse) of the withdrawalright (whether it is a single right of with-drawal or a hanging right of withdraw-al), the amount of the unlapsed right ofwithdrawal for the year of death will beincluded in the estate of the holder ofthe power. Code § 2041(a)(2). In addi-tion, the holder of the power willbecome the (new) “transferor” of theunlapsed power for GST tax purposes,and the GST tax exemption previouslyallocated by the grantor will be lost andwasted. Treas. Reg. § 26.2652–1(a)(2).

Deceased Beneficiary’s Waiveror Release of a CrummeyWithdrawal Right

The gross estate of a decedent includesthe value of property subject to a gener-al power of appointment that wasreleased or exercised before the dece-dent’s death if the result of the release orexercise is the creation of a retainedinterest described in Code §§ 2035, 2036,2037, or 2038. Code § 2041(a)(2). If abeneficiary waives his or her Crummeywithdrawal right or allows his or herCrummey withdrawal right (which, aspreviously mentioned, is a generalpower of appointment under Code§§ 2514 and 2041) to lapse in an amountgreater than the “5 and 5”safe harboramount described in Code §§ 2514(e)and 2041(b)(2), the waiver or lapse ofthat Crummey withdrawal right will betreated as a taxable release of a generalpower of appointment for transfer taxpurposes. In addition, the holder of thepower will become the (new) transferorof the released power for GST purposes.Treas. Reg. § 26.2652–1(a)(2). The factthat the beneficiary holds a testamen-tary limited power of appointment over



held a general power of appointment,and which property is included in thedecedent’s gross estate. The executor’sright of apportionment/recovery is ona pro rata basis. A decedent can opt outof the recovery/apportionment provi-sions of this Code section by stating soin his or her will. A general provisionin the decedent’s will to pay all taxesfrom residue will be sufficient to optout of the Code’s apportionment/recovery scheme. Because a Crummeywithdrawal right is a general power ofappointment and may be included in abeneficiary’s estate under Code § 2041,who should be responsible for the fed-eral estate taxes in such instance? TheCrummey trust may be an unfunded andilliquid life insurance trust and unableto reimburse the beneficiary’s estateunder the recovery rules of Code § 2207.

Executor’s Right to Recover EstateTax Attributable to Grantor’s RetainedInterest

The executor of a decedent’s estate isentitled to recover federal estate taxespaid by the estate that are attributableto property or interests in property thatare included in the decedent’s grossestate under Code § 2036. The execu-tor’s right of apportionment/recoveryis on a marginal or incremental basis. Adecedent can opt out of the recovery/apportionment provisions of this Codesection by stating so in his or her will orrevocable living trust. Specific reference

to Code § 2207A (or its provisions) inthe decedent’s will or revocable livingtrust is required to opt out of the Code’sapportionment/recovery scheme. If thebeneficiary releases the Crummey with-drawal right (which, as previouslymentioned, is a general power ofappointment) and retains an interest inthe trust that is included in the benefi-ciary’s estate under Code § 2036, whoshould be responsible for the federalestate taxes? The Crummey trust may beilliquid and unable to reimburse thebeneficiary’s estate under the recoveryrules of Code § 2207B. Crummey trustproperty may be included in thegrantor’s gross estate because thegrantor retained the right to vote sharesof stock described in Code § 2036(b).But which section of the Code appliesfor apportionment/recovery when theretained interest results in the life insur-ance proceeds being included in thegrantor’s gross estate? Code § 2206 callsfor pro rata reimbursement, whereasCode § 2207B calls for incrementalreimbursement. A possible solutionmay be for the grantor’s will to requireall apportionment/reimbursementunder Code §§ 2206–2207B to be on anincremental basis.

To Be Continued

This article will conclude its discussionof the income and transfer tax aspectsof Crummey demand powers in theMarch/April 2004 issue. ■

the property subject to the taxablerelease will not avoid inclusion of thatproperty in the beneficiary’s grossestate. Code § 2041(a)(2). The testamen-tary limited power of appointment overthe released property will prevent, how-ever, the taxable release from being acompleted gift (to the other Crummeytrust beneficiaries) at the time of itsrelease under Code § 2514(b). Treas.Reg. § 25.2511–2(b). If the Crummey trustprovides the beneficiary with a lifetimeincome interest in the trust, an estate taxproblem arises because the beneficiaryhas made a transfer (of the amount ofthe taxable release) with a retained lifeincome interest in the trust property.Code § 2036(a). When the beneficiarydies, a percentage of the Crummey trustwill be included in his or her grossestate. The percentage included will bebased on a fraction—the numerator isthe amount of the release and thedenominator is the amount of the valueof the Crummey trust at the time of therelease. Treas. Reg. §20.2041–3(d)(4).Multiple or cumulative taxable releasesare aggregated. Treas. Reg.§ 20.2041–3(d)(5).

Executor’s Right to Recover Estate TaxAttributable to General Power ofAppointment

The executor of a decedent’s estate isentitled to recover federal estate taxespaid by the estate that are attributableto property over which the decedent


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