Crummey Demand Powers

The gift tax annual exclusion allows individuals to transfer certain amounts of property to others without triggering gift taxes. The exclusion is available for "present interest" gifts only. Present interest gifts are gifts that the donee can use or enjoy now, not at some time in the future.

With outright gifts of property, this is usually not a problem. However, gifts to trusts may impose substantial restrictions on the donee's rights to the property. In order to assure the annual exclusion, the beneficiaries of the trust must have a power to withdraw gifts made to the trust.

The case of D. Clifford Crummey v. Commissioners in 1968 demonstrated these powers, now known as Crummey Powers. The beneficiary can usually only exercise these powers during a specific period of time during the year. The beneficiary must know that a gift is made. Rights are not cumulative and expire after the designated period. Also, the beneficiary must be given a reasonable period of time in which to exercise rights (e.g. usually a minimum of 30 days).

Irrevocable insurance trusts provide a good example of the need for Crummey Powers. Most insurance trusts postpone a beneficiary's ability to enjoy and use the trust property until after the death of the insured. This means that the beneficiary does not have a present interest in the trust property.

In order for the grantor to receive the annual exclusion with respect to a gift made to the trust, the beneficiaries of the trust must have a present interest in the gift. If the beneficiaries are given the right to withdraw all or part of the premiums given to the trust during a specified period of time, this gives them a present interest in the gift. Thus, a gift of premiums paid to the trust by the grantor is offset by the grantor's annual exclusion.

If the Crummey Powers are not exercised, gifts are available to pay the policy premiums. It's clear that exercising the powers is not necessarily in the best interests of the beneficiaries – the insurance could be allowed to lapse if the premiums are not paid. (See Hanging Powers.)

To avoid adverse gift or estate tax consequences to the beneficiaries, a Crummey Power may be limited to a right to demand the greater of $5,000 or 5% of trust assets.