Gift Tax and LIfe Insurance

<div class="Section1">The gift tax marital deduction generally is not available for a gift in trust unless the donee spouse has at least the right to all the income from the property and a general power of appointment over the principal, or unless the donee spouse’s income interest is a “qualifying income interest for life” in the property transferred, in which case the donee spouse does not usually have to have a general power of appointment over the principal. Because a life insurance policy ordinarily does not produce income before maturity, the requirement that the donee spouse receive all the income for life will not be met unless the donee spouse has the power to compel the trustee to convert the policy to income-producing property, or the power to terminate the trust and demand the policy.<a href="#_ftn1" name="_ftnref1">¹</a> An annual exclusion may be allowed instead of the marital deduction if the donee spouse is not a U.S. citizen.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. §§ 25.2523(e)-1(f)(4), 25.2523(e)-1(f)(6).<br /> <br /> </div>

<div class="Section1">Yes. If the trustee is directed to pay the dividends to the trust beneficiary, the value of probable dividends will be considered a gift of a present interest.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>Tidemann v. Commissioner</em>, 1 TC 968 (1943).<br /> <br /> </div>

<div class="Section1"><br /> <br /> A reversionary interest trust is a trust whose property will, on specified circumstances, revert to the grantor.<br /> <br /> In a reversionary interest trust, the gift is the right to receive <em>trust income</em> during the trust term. The value of this right is determined and taxed in the year the trust is established. The value of the gift generally is the value of the property transferred less the value of the grantor’s retained interest.<a href="#_ftn1" name="_ftnref1">¹</a> The value of these income and reversionary (or remainder) interests are determined using the estate and gift tax valuation tables. For example, assuming a valuation table interest rate of 7 percent and a trust term of 45 years, the value of the gift of income is 0.952387 times the value of the property (1 - 0.047613). However, if the reversionary interest is not a qualified interest, the value of the gift is generally the full value of the property transferred to the trust.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> To avoid the above result, an annuity or unitrust interest generally should be given to the trust rather than an income interest.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 25.2512-9(a)(1)(i).<br /> <br /> </div>

<div class="Section1">IRC Section 2503(c) provides that there is a gift of a present interest if the property that constitutes the gift and all income from the property (1) <em>may</em> be expended for the benefit of the minor, and (2) <em>will</em>, to the extent not so expended, pass to the minor when the minor is age 21, or, if the minor dies before reaching age 21, be payable to the minor&rsquo;s estate or as the minor may appoint under a general power of appointment.<a href="#_ftn1" name="_ftnref1">¹</a> The fact that under local law a minor is legally unable to exercise a power or to execute a will does not cause the transfer to fail to satisfy the conditions.<a href="#_ftn2" name="_ftnref2">²</a> Any premiums paid on the policy by the grantor should qualify as gifts of a present interest ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="223">223</a>).<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2503(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;25.2503-4.<br /> <br /> </div></div><br />

<div class="Section1">Yes. In one case, a wife placed a policy on her husband’s life in a revocable trust for their children. It was held that a gift from the wife to the children was made when the insured died and the trust became irrevocable. The value of the gift was the full amount of the death proceeds.<a href="#_ftn1" name="_ftnref1">¹</a> If the trust had been irrevocable, the annual premiums paid by the wife, instead of the proceeds, would have constituted gifts.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>Goodman v. Commissioner</em>, 156 F.2d 218 (2d Cir. 1946).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Watkins v. Commissioner</em>, 2 TCM (CCH) 252 (1943).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Although such transfers would ordinarily be future interest gifts, it has been held that they will be treated as present interest gifts, qualifying for the exclusion, to the extent the trust beneficiaries are given immediate withdrawal rights with respect to the amounts transferred.<a href="#_ftn1" name="_ftnref1">¹</a> Such trusts are known as <em>Crummey</em> trusts, after the case of <em>Crummey v. Commissioner.</em><a href="#_ftn2" name="_ftnref2">²</a><br /> <blockquote><em>Example</em>. G creates an irrevocable insurance trust for each of his four children, transferring amounts (additions) from year to year to fund the trusts. Two of the children are minors when the trusts are created and for several years thereafter, but neither has a court-appointed guardian. The trusts provide that with respect to the additions, each child may demand in writing at any time (up to the end of the calendar year in which an addition is made) the sum of $5,000 or the amount of the addition, whichever is less, payable immediately in cash. If a child is a minor when an addition is made, the child’s guardian may make such demand on the child’s behalf and hold the amount received for the benefit and use of the child. To the extent demands for payment are not made by the beneficiaries, the trustee is directed to use the additions to pay insurance premiums as needed and to purchase additional insurance and investments for the trust. G transfers to each trust $5,000 each year the trusts are in existence. Each trust provides that it is irrevocable for the lifetime of the beneficiary and that the trust assets will revert to the grantor only if the beneficiary dies before age 21. All children survive past age 21. By the rule of the <em>Crummey</em> case, G is entitled under present law to $20,000 in gift tax annual exclusions each year ($5,000 for each child). It does not matter that the minor children never had guardians appointed. Had the trusts given the beneficiaries immediate payment rights of no more than $2,000 each with respect to the additions, G’s exclusions would be limited to $8,000 per year (assuming he made no other present-interest gifts to his children during the year).</blockquote><br /> The IRS has ruled that when the beneficiary of a discretionary trust was a competent adult, contributions to the trust did not qualify for the annual exclusion because the beneficiary did not receive timely notice or have actual knowledge of the right to demand immediate distribution of contributions.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Another ruling allowed the annual exclusion where the trust provided for timely written notice to the beneficiaries of their withdrawal rights, and where the beneficiaries were given a 30-day period within which to exercise their withdrawal rights.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Yet another ruling allowed the exclusion where the trust required the trustee to notify the beneficiaries within seven days of receipt of additional contributions and further required that the beneficiaries be given 30 days after receipt of notice within which to exercise their withdrawal rights.<a href="#_ftn5" name="_ftnref5">⁵</a> If the beneficiary is given reasonable notice of the right to withdraw and a reasonable time within which to exercise the right, the fact that a calendar year ends between the date of the transfer and the date the beneficiary received notice does not transform a present interest gift into a future interest gift.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The annual exclusion was not allowed, however, when the beneficiaries waived their right to receive notice of contributions to the trust with respect to which their withdrawal rights could be exercised. Furthermore, the annual exclusion was not allowed because the grantor set up a trust that provided that notice was to be given to the trustee as to whether a beneficiary could exercise a withdrawal power with respect to a transfer to the trust and the grantor never notified the trustee that the withdrawal powers could be exercised with respect to any of the transfers to the trust. Thus, the gifts were not transfers of a present interest under the meaning of IRC Section 2503(b).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The value of a withdrawal right may be reduced, even to zero, if the trustee has discretion to invade the trust corpus for the benefit of non-<em>Crummey</em> beneficiaries.<a href="#_ftn8" name="_ftnref8">⁸</a> The exclusion is allowed only to the extent there is cash, or assets reducible to cash, in the trust to satisfy any beneficiary demand rights, or to the extent the trustee is required to maintain sufficient liquidity to meet immediate withdrawal demands.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Where appointment of a legal guardian would be necessary to enable a beneficiary to exercise the withdrawal right, sufficient time (at least 30 days) should be allowed to make the appointment before the right to withdraw terminates.<a href="#_ftn10" name="_ftnref10">¹⁰</a> “If there is no impediment under the trust or local law to the appointment of a guardian and the minor donee has a right to demand distribution, the transfer is a gift of a present interest that qualifies for the annual exclusion allowable under Section 2503(b) of the Code.”<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> Reciprocal <em>Crummey</em> trusts have been unsuccessfully tried in an attempt to increase each donor’s annual exclusion. In Revenue Ruling 85-24,<a href="#_ftn12" name="_ftnref12">¹²</a> A, B, and C, partners in the X partnership, each created a <em>Crummey</em> trust for their children. Each contributed $20,000 to the trust initially. A’s trust gave his child, F, a power to withdraw $10,000 of the contribution within 60 days, and gave B and C each the power to withdraw $5,000 on the same terms. B’s trust gave his child, G, the power to withdraw $10,000, and gave A and C each the power to withdraw $5,000. C’s trust gave his child, H, the power to withdraw $10,000, and gave A and B each the power to withdraw $5,000. A, B, and C each claimed a $20,000 gift tax exclusion for the year in which the trusts were created. The IRS ruled that A, B, and C were entitled to only a $10,000 exclusion for the gifts to their children. No gift tax exclusions were allowable with respect to the <em>Crummey</em> powers the partners gave one another. These transfers, according to the IRS, were not gifts because they were based on adequate consideration, namely, the consideration for the reciprocal transfers among the partners was each partner’s forgoing the exercise of the right of withdrawal in consideration of the other partners’ similar forbearance. The IRS said further that upon the lapse of a partner’s withdrawal power, the child’s gift (from his parent) was increased by $5,000, but the failure of the partner to exercise the power was not considered a lapse of a general power of appointment (i.e., not a gift) because the transfer to the partner was not a gift.<br /> <br /> Since August 24, 1981, the IRS has had the following types of <em>Crummey</em> insurance trusts under extensive study and has stated that it will not issue rulings or determination letters on the allowability of the gift tax annual exclusion for transfers of property to such trusts until it resolves the issues through publication of a revenue ruling, revenue procedure, or regulation:<br /> <blockquote>(1)     The trust corpus consists or will consist substantially of insurance policies on the life of the grantor or the grantor’s spouse;<br /> <br /> (2)     The trustee or any other person has a power to apply the trust’s income or corpus to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse;<br /> <br /> (3)     The trustee or any other person has a power to use the trust’s assets to make loans to the grantor’s estate or to purchase assets from the grantor’s estate;<br /> <br /> (4)     The trust beneficiaries have the power to withdraw, on demand, any additional transfers made to the trust; and<br /> <br /> (5)     There is a right or power in any person that would cause the grantor to be treated as the owner of all or a portion of the trust under IRC Sections 673 to 677.<a href="#_ftn13" name="_ftnref13">¹³</a></blockquote><br /> The IRS has ruled with respect to <em>Crummey</em> trusts that the annual exclusion could not be applied to trust contributions on behalf of trust beneficiaries who had withdrawal rights as to the contributions (except to the extent they exercised their withdrawal rights) but who had either no other interest in the trust (a naked power) or only remote contingent interests in the remainder.<a href="#_ftn14" name="_ftnref14">¹⁴</a> The Tax Court, however, has rejected the IRS’s argument that a power holder must hold rights other than the withdrawal right to obtain the annual exclusion. The withdrawal right (assuming there is no agreement to not exercise the right) is sufficient to obtain the annual exclusion.<a href="#_ftn15" name="_ftnref15">¹⁵</a> (Language in <em>Cristofani</em> appears to support use of naked powers although the case did not involve naked powers.) The IRS has stated that, applying the substance over form doctrine, the annual exclusions should not be allowed where the withdrawal rights are not in substance what they purport to be in form. If the facts and circumstances show an understanding that the power is not meant to be exercised or that exercise would result in undesirable consequences, then creation of the withdrawal right is not a bona fide gift of a present interest and an annual exclusion should not be allowed.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> In TAM 9628004, annual exclusions were not allowed where transfers to the trust were made so late in the first year that <em>Crummey</em> withdrawal power holders had no opportunity to exercise their rights, most power holders had either no other interest in the trust or discretionary income or remote contingent remainder interests, and withdrawal powers were never exercised in any year. However, annual exclusions were allowed where the IRS was unable to prove that there was an understanding between the donor and the beneficiaries that the withdrawal rights should not be exercised.<a href="#_ftn17" name="_ftnref17">¹⁷</a> In TAM 97310004, annual exclusions were denied where eight trusts were created for eight primary beneficiaries, but <em>Crummey</em> withdrawal powers were given to<br /> 16 persons who never exercised their powers; most power holders held either a remote contingent interest or no interest other than the withdrawal power in the trusts in which the power holder was not the primary beneficiary.<br /> <br /> Substance over form analysis may be applied to deny annual exclusions when indirect transfers are used in an attempt to obtain inappropriate annual exclusions for gifts to intermediate recipients.<a href="#_ftn18" name="_ftnref18">¹⁸</a> For example, suppose that in 2025, A transfers to B, C, and D $19,000 each. By arrangement, B, C, and D each immediately transfer $19,000 to E. The annual exclusion for A’s indirect transfers to E is limited to $19,000 and A has made taxable gifts of $38,000 to E. Under the appropriate circumstances, the substance over form analysis might even be used to deny annual exclusions for <em>Crummey</em> powers.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.       <em>Crummey v. Commissioner</em>, 397 F.2d 82 (9th Cir. 1968); Rev. Rul. 73-405, 1973-2 CB 321; Let. Ruls. 7826050, 7902007, 7909031, 7947066, 8007080, 8118051, 8445004, 8712014, 9625031.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.       <em>Crummey v. Commissioner</em>, 397 F.2d 82 (9th Cir. 1968).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.       Rev. Rul. 81-7, 1981-1 CB 474; Let. Rul. 7946007.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.       Let. Rul. 8003033. <em>See also</em> Let. Ruls. 8517052, 8813019.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.       Let. Rul. 8004172.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.       Rev. Rul. 83-108, 1983-2 CB 167.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.       TAM 9532001.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.       Let. Ruls. 8107009, 8213074.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.       Let. Ruls. 8126047, 8134135. <em>But see also</em> Let. Ruls. 7909031, 8007080, 8006109, 8021058, which allowed the exclusion where liquidity requirements were not clearly stated.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.     Let. Ruls. 8022048, 8134135, 8326074, 8517052, 8610028, 8616027.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.     Rev. Rul. 73-405, 1973-2 CB 321. <em>See also</em> Let. Ruls. 8326074, 8335050, 8517052, 8610028, 8616027, 8701007. But <em>see also Naumoff v. Commissioner</em>, TC Memo 1983-435, and Let. Rul. 8229097.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.     1985-1 CB 329.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.     Rev. Proc. 2009-3, § 4.46, 2009-1 IRB 107.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.     TAMs 9141008, 9045002, 8727003.<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.     <em>Estate of Cristofani v. Commissioner</em>, 97 TC 74 (1991), acq. in result, 1996-2 CB 1.<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.     Action on Decision 1996-010.<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.     <em>Estate of Kohlsaat</em>, TC Memo 1997-212; <em>Estate of Holland v. Commissioner</em>, TC Memo 1997-302.<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.    <em>Heyen v. U.S.</em>, 945 F.2d 359, 91-2 USTC ¶ 60,085 (10th Cir. 1991).<br /> <br /> </div>

<div class="Section1"><br /> <br /> In the usual case, no annual exclusions are allowable either on the creation of the trust or on the payment of premiums ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="219">219</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="223">223</a>).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <blockquote><em>Example.</em> C transfers certain insurance policies on C&rsquo;s own life to a trust created for the benefit of D. Upon C&rsquo;s death the proceeds of the policies are to be invested, and the net income paid to D during D&rsquo;s lifetime. Because the income payments to D will not begin until after C&rsquo;s death, the transfer in trust represents a gift of a future interest in property against which no exclusion is available.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> If the beneficiary were given the power to demand trust principal, apparently the annual exclusion would be available.<a href="#_ftn3" name="_ftnref3">³</a> Such a power, however, would cause the trust principal to be includable in the beneficiary&rsquo;s gross estate.<br /> <br /> Where an employee assigned his group life insurance policy to an irrevocable trust, the IRS ruled that subsequent premiums paid by the employer qualified for the annual exclusion as gifts of a present interest by the <em>employee</em>. Under the terms of the trust, the beneficiary or the beneficiary&rsquo;s estate was to receive the full proceeds of the policy immediately on the insured&rsquo;s death.<a href="#_ftn4" name="_ftnref4">⁴</a> In a later ruling, the facts essentially were the same, except that the trust terms directed the trustee to retain the insurance proceeds, paying income to the insured&rsquo;s children for life, with the remainder to the grandchildren; the employer&rsquo;s premium payments following the assignment were held to be gifts of a future interest in property, therefore not qualifying for the annual exclusion.<a href="#_ftn5" name="_ftnref5">⁵</a> (<em>See also</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="80">80</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="168">168</a>.)<br /> <br /> The IRS also has allowed the gift tax annual exclusion when a grantor created a trust with an initial contribution of a $50,000 group term policy on the grantor&rsquo;s life and $1,000 in cash. The trust gave the grantor&rsquo;s spouse a $3,000 annual noncumulative withdrawal right and provided that any asset in the trust, including the insurance policy, could be used to satisfy the demand. In this private letter ruling, the IRS held that the grantor&rsquo;s initial contribution, as well as the grantor&rsquo;s employer&rsquo;s subsequent premium payments on the group term insurance, would qualify for the exclusion.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> For a discussion of the special provision with respect to gifts in trust to minors, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="160">160</a>. For a discussion of Crummey withdrawal rights, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="161">161</a>.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;25.2503-2; <em>Commissioner v. Boeing</em>, 123 F.2d 86 (9th Cir. 1941).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;25.2503-3(c)(Ex. 2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Halsted v. Commissioner</em>, 28 TC 1069 (1957), acq. 1958-2 CB 5.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 76-490, 1976-2 CB 300.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 79-47, 1979-1 CB 312.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 8006109.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The withdrawal power held by a <em>Crummey</em> trust beneficiary is a general power of appointment. If a <em>Crummey</em> trust provides for a contingent beneficiary to succeed to the interest of the primary beneficiary in the event of the primary beneficiary&rsquo;s death before the trust terminates, the primary beneficiary&rsquo;s failure to exercise the withdrawal right acts as a transfer to the contingent beneficiary, either at the time of the lapse of the withdrawal right or at the time of the primary beneficiary&rsquo;s death. The amount thus transferred is subject to federal gift or estate tax to the extent it exceeds the greater of $5,000 or 5 percent of the aggregate value of the assets out of which, or the proceeds of which, the exercise of the withdrawal right could be satisfied.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A spouse who is given a withdrawal power would be treated as making gifts to remainder persons each time the spouse allows a withdrawal power to lapse to the extent that the lapsed power exceeds the greater of $5,000 or 5 percent of the trust principal. Furthermore, the value of the gift would not be reduced by the spouse&rsquo;s retained income interest or the spouse&rsquo;s interest in principal subject to an ascertainable standard because such interests are not qualified retained interests under IRC Section 2702.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> In 2024, in those cases where (1) the primary beneficiary&rsquo;s gift or estate tax liability is to be avoided, and (2) the trust value is less than $360,000 in the case of an $18,000 withdrawal right, or less than $720,000 in the case of a $36,000 withdrawal right (two spouses, as grantors, splitting the gift), the &ldquo;5 or 5&rdquo; limitation must be considered.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> A hanging power is one method that has been used in an attempt to manage the &ldquo;5 or 5&rdquo; limitation. A hanging power is designed to lapse in any year only to the extent that the power does not exceed the $5,000 or 5 percent (&ldquo;5 or 5&rdquo; limitation). Any excess is carried over to succeeding years and lapses only to the extent that the power does not exceed the &ldquo;5 or 5&rdquo; limitation in such years.<br /> <br /> <hr><br /> <br /> <blockquote><em>Example.</em> Beginning in 2002, parents transfer an amount equal to eight (2 donors x 4 donees) times the annual exclusion to a trust each year. Four children are each given a right to withdraw an amount equal to two (2 donors) times the annual exclusion annually. Upon non-exercise of the power to withdraw, the power lapses in any year to the extent of the greater of $5,000 or 5 percent of corpus. To the extent that a power does not lapse in a year, it is carried over and added to any power arising in the succeeding year. The hanging power is eliminated in the tenth year (i.e., when carryover equals zero).</blockquote><br /> <table style="height: 360px;" border="1" width="643" align="center"><br /> <tbody><br /> <tr><br /> <td style="text-align: center;" width="96"><strong>YEAR</strong></td><br /> <td style="text-align: center;" width="96"><strong>CORPUS ($)</strong></td><br /> <td style="text-align: center;" width="96"><strong>POWER ($)</strong></td><br /> <td style="text-align: center;" width="96"><strong>LAPSE ($)</strong></td><br /> <td style="text-align: center;" width="123"><strong>CARRYOVER ($)</strong></td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2002</td><br /> <td style="text-align: center;" width="96">80,000</td><br /> <td style="text-align: center;" width="96">20,000</td><br /> <td style="text-align: center;" width="96">5,000</td><br /> <td style="text-align: center;" width="123">15,000</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2003</td><br /> <td style="text-align: center;" width="96">168,000</td><br /> <td style="text-align: center;" width="96">37,000</td><br /> <td style="text-align: center;" width="96">8,400</td><br /> <td style="text-align: center;" width="123">28,600</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2004</td><br /> <td style="text-align: center;" width="96">256,000</td><br /> <td style="text-align: center;" width="96">50,600</td><br /> <td style="text-align: center;" width="96">12,800</td><br /> <td style="text-align: center;" width="123">37,800</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2005</td><br /> <td style="text-align: center;" width="96">344,000</td><br /> <td style="text-align: center;" width="96">59,800</td><br /> <td style="text-align: center;" width="96">17,200</td><br /> <td style="text-align: center;" width="123">42,600</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2006</td><br /> <td style="text-align: center;" width="96">432,000</td><br /> <td style="text-align: center;" width="96">64,600</td><br /> <td style="text-align: center;" width="96">21,600</td><br /> <td style="text-align: center;" width="123">43,000</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2007</td><br /> <td style="text-align: center;" width="96">528,000</td><br /> <td style="text-align: center;" width="96">67,000</td><br /> <td style="text-align: center;" width="96">26,400</td><br /> <td style="text-align: center;" width="123">40,600</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2008</td><br /> <td style="text-align: center;" width="96">624,000</td><br /> <td style="text-align: center;" width="96">64,600</td><br /> <td style="text-align: center;" width="96">31,200</td><br /> <td style="text-align: center;" width="123">33,400</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2009</td><br /> <td style="text-align: center;" width="96">720,000</td><br /> <td style="text-align: center;" width="96">57,400</td><br /> <td style="text-align: center;" width="96">36,000</td><br /> <td style="text-align: center;" width="123">21,400</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2010</td><br /> <td style="text-align: center;" width="96">824,000</td><br /> <td style="text-align: center;" width="96">47,400</td><br /> <td style="text-align: center;" width="96">41,200</td><br /> <td style="text-align: center;" width="123">6,200</td><br /> </tr><br /> <tr><br /> <td style="text-align: center;" width="96">2011</td><br /> <td style="text-align: center;" width="96">928,000</td><br /> <td style="text-align: center;" width="96">32,200</td><br /> <td style="text-align: center;" width="96">32,200</td><br /> <td style="text-align: center;" width="123">&nbsp; &nbsp; &nbsp; &nbsp; 0</td><br /> </tr><br /> </tbody><br /> </table><br /> In Letter Ruling 8901004, a hanging <em>Crummey</em> withdrawal power written in the form of a tax savings clause was ruled invalid. Many commentators believe that a hanging power that lapses only to the extent that the power does not exceed the &ldquo;5 or 5&rdquo; limitation (rather than by reference to whether there would be a taxable gift) would be valid.<br /> <br /> A power holder is not treated as making a gift upon the lapse of a general power if the power holder is, in effect, still the owner of the property after the lapse. Consequently, other methods used in an attempt to manage the &ldquo;5 or 5&rdquo; limitation include giving the power holder a testamentary limited power to appoint the property to other than the power holder or the power holder&rsquo;s estate, and vesting the property in the power holder.<br /> <br /> Under each of these methods for managing the &ldquo;5 or 5&rdquo; limitation for gift tax purposes, estate tax inclusion could result ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="181">181</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="205">205</a>).<br /> <br /> Since August 24, 1981, the IRS has had the following types of <em>Crummey</em> insurance trust under extensive study and has stated that it will not issue rulings or determination letters on the applicability of IRC Section 2514(e) to a beneficiary&rsquo;s lapse of a withdrawal power when:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; The trust corpus consists or will consist substantially of insurance policies on the life of the grantor or the grantor&rsquo;s spouse;<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; The trustee or any other person has a power to apply the trust&rsquo;s income or corpus to the payment of premiums on policies of insurance on the life of the grantor or the grantor&rsquo;s spouse;<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; The trustee or any other person has a power to use the trust&rsquo;s assets to make loans to the grantor&rsquo;s estate or to purchase assets from the grantor&rsquo;s estate;<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; The trust beneficiaries have the power to withdraw, on demand, any additional transfers made to the trust; and<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is a right or power in any person that would cause the grantor to be treated as the owner of all or a portion of the trust under IRC Sections 673 to 677.<a href="#_ftn3" name="_ftnref3">³</a></blockquote><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2514(e).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9804047.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Proc. 2009-3, &sect;&nbsp;4.46, 2009-1 IRB 107.<br /> <br /> </div></div><br />