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January/February 2004
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Income, Gift, and Estate Tax Aspects of Crummey Powers After the 2001 Tax Act
Part 1

By Sebastian V. Grassi Jr.

Sebastian V. Grassi Jr. is a partner in the Troy, Michigan law firm of Grassi & Toering, PLC. This article is adapted from Grassi, A Practical Guide to Drafting Irrevocable Life Insurance Trusts (ALI/ABA 2003).

The need for Crummey withdrawal right trusts, such as irrevocable life insurance trusts or Code § 2642(c) grandchild trusts, among other things, has not been diminished by the Economic Growth and Tax Relief and Reconciliation Act of 2001, Pub. L. No. 107–16, 115 Stat. 38 (2001) (“2001 Tax Act”). The uncertainty surrounding the permanency of the repeal of federal estate taxes and generation-skipping transfer (GST) taxes, because of the Act’s sunset provisions, which take effect January 1, 2011, and reinstate the pre-2001 Tax Act transfer tax regime, underscores the need for clients with estates greater than $1 million to consider the use of irrevocable trusts as a means of transferring appreciating property or life insurance to the grantor’s descendants and removing it from inclusion in the grantor’s gross estate. Because the gift tax applicable exclusion amount remains frozen at the $1 million level (even if the estate and GST tax is permanently repealed), grantors will want to use their available annual exclusion amount under Code § 2503(b) before using their $1 million gift tax applicable exclusion amount. Thus, the Crummey trust with its corresponding right of withdrawal granted to the beneficiaries will serve as a useful tool when the grantor wants to preserve his or her $1 million gift tax applicable exclusion amount. A Crummey withdrawalright is simple in concept but complex in terms of its tax implications.

This article is divided into two parts. Part 1 discusses various common income, gift, and estate tax issues that an attorney may encounter, or want to consider, when drafting Crummey powers under the 2001 Tax Act. Part 2, which will appear in the March/April 2004 issue , will discuss the generation-skipping transfer tax aspects of Crummey powers under the 2001 Tax Act.

Income Tax Aspects of a Crummey Withdrawal Right

An irrevocable trust is a separate taxpayer, unless (1) the trust is a defective grantor trust under Code §§ 671–677 (in which case the grantor will be taxed on the trust’s income) or (2) a nongrantor (such as a Crummey withdrawal right beneficiary) is treated as the owner of the trust for income tax purposes under Code § 678 (in which case the nongrantor will be taxed on the trust’s income).

Under Code § 678, a person other than the grantor is treated as the owner (for income tax purposes) of any portion of a trust for which such person (such as a Crummey withdrawal right beneficiary) either (1) has a power exercisable solely by himself to vest the corpus or the income from the corpus in himself (such as a beneficiary with a Crummey withdrawal right), or (2) has previously partially released or modified such a power and afterward retains sufficient control, which would make the grantor taxable as the owner under the grantor trust rules. If the grantor holds a power under Code §§ 673 through 677 and the beneficiary holds a Code § 678 power (such as a Crummey withdrawal right) over the same income, the beneficiary’s power is disregarded, and the grantor is taxed as the owner of the trust income. The Code is, however, unclear concerning the grantor being taxed as the owner of the principal, because Code § 678(b) refers only to “income,” whereas Code § 678(a)(1) refers to a beneficiary’s power to vest “corpus or the income therefrom.” Several commentators are of the opinion that this incongruency is a drafting error, and that the grantor trumps the beneficiary as to both income and corpus. In several PLRs the IRS has taken the position that the grantor is treated as the owner of the corpus (whenever possible) despite the existence of a Code § 678 power (of withdrawal) held by a beneficiary. PLRs 9321050, 9309023, 9140127, 8308033, 8326074, 8142061, 8103074, and 7909031.

An additional incongruency is found in the language of Code § 678(a)(2) itself, which refers to a beneficiary who has “previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of Code §§ 671 to 677, inclusive, subject grantor of a trust to treatment as the owner thereof.” (Emphasis added.) The Code refers to a “release,” and a release connotes an affirmative act on the part of the holder of the power. A lapse, on the other hand, requires no action by the holder of the power. Interestingly, Congress found it necessary to expressly state that a lapse of a general power of appointment is a “release” for estate and gift tax purposes. The failure of Congress, however, to make a similar statement for income tax purposes appears to be an indication that Congress did not intend to equate a lapse with a release for the grantor trust rules.

Gift Tax Aspects of a Crummey Withdrawal Right

Annual Exclusion Gifts

For a gift to qualify as a gift of a present interest that is eligible for the annual gift tax exclusion, the donee must have the unrestricted right to the immediate use, possession, or enjoyment of the property or the income from the property. Treas. Reg. § 25.2503–3(b). A Crummey withdrawal right over a  contribution to a trust constitutes an unrestricted right to the immediate use, possession, or enjoyment of the  contributed property and converts what would otherwise be a gift of a future interest into a gift of a present interest that qualifies for the annual gift tax exclusion under Code § 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 has attempted to place limits on the expansion of the class of beneficiaries eligible to hold Crummey withdrawal rights. Generally, the IRS officially recognizes only Crummey withdrawal right beneficiaries who hold a current income interest or vested remainder interest in the trust, provided there is no preexisting understanding between the grantor and the beneficiaries concerning the non-exercise of their withdrawal rights. TAM 9731004; PLR 9030005; Rev. Rul. 85–24, 1985–1 C.B. 329; and Rev. Rul. 81–7, 1981–1 C.B. 474. But see Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991), AOD 1996–010; Estate of Kohlsaat 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 implicitly rejected the IRS’s “prearranged understanding” test and permitted Crummey withdrawal rights to qualify for the gift tax annual exclusion when the beneficiaries had discussed in detail the purpose of the trust and their desire to not exercise their right of withdrawal).

The IRS will not issue advance rulings concerning the availability of the annual gift tax exclusion involving irrevocable life insurance trusts with Crummey withdrawal rights. Rev. Proc. 82–22, 1982–1 C.B. 469.

A Crummey withdrawal right granted to a spouse is a nondeductible terminable interest and does not qualify for the gift tax marital deduction (although the withdrawal right may qualify for the annual gift tax exclusion under Code § 2503(b)). Code § 2523(b). If the donee-spouse is not a U.S. citizen the annual gift tax exclusion amount available to the donor-spouse (concerning present interest gifts) to a non-U.S. citizen donee-spouse is, however, increased from $10,000 (indexed for inflation) to $100,000 (indexed for inflation) per calendar year. Code § 2513(i). There is no gift tax marital deduction available for gifts to the non-U.S. citizen spouse.

A grantor’s irrevocable contribution to a trust on December 31 is a completed gift as of that date (for gift tax purposes), even though the beneficiary does not receive notice of the contribution until several days later and the beneficiary’s Crummey withdrawal right does not expire until 30 days thereafter. Rev. Rul. 83–108, 1983–2 C.B. 167. If the grantor dies shortly after delivery of a gift check to the trustee, the gift check will be considered a completed gift when it is deposited, cashed against available funds, or presented for payment in the calendar year for which completed gift treatment is sought, if certain conditions are met. See Rev. Rul. 96–56, 1996–2 C.B. 161; see also Estate of Metzger 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, when used with a hanging withdrawal power or with trust beneficiaries having separate trust shares coupled with testamentary powers of appointment, permits the grantor to make annual gifts to a Crummey trust that are twice the amount of the grantor’s available annual gift tax exclusion amount. Gift splitting is available to the grantor if (1) the spouse is a resident of the United States or a U.S. citizen, (2) the spouse is married to the grantor at the time of the gift, and (3) the spouse does not remarry during the remainder of the calendar year. Gift splitting is particularly helpful in large premium cases. A donor cannot elect gift splitting for gifts to his or her spouse; in other words, a donee spouse cannot elect to split gifts to himself or herself. Code § 2513(a)(1). If the donor transfers property in part to his spouse and in part to third parties, the election to split such a gift by the donee spouse is effective only “ with respect to the interest transferred to third parties only insofar as such interest is ascertainable at the time of the gift and hence severable from the interest transferred to [the donee] spouse.” Treas. Reg. § 25.2513–1(b)(4) (emphasis added). If the donee (consenting) spouse has an annuity, life estate, remainder interest, or other determinable interest, the third parties’ interests would be ascertainable and would be eligible for gift-splitting. When the donee (consenting) spouse and other beneficiaries have Crummey withdrawal rights over the gifted property, the amount subject to withdrawal by the other beneficiaries would be ascertainable and thus eligible for gift splitting. See PLRs 8044080, 8112087, 8138012, 8138171, 8138170, 8143045, 200130030. The amount subject to withdrawal by the donee (consenting) spouse, however, would not be eligible for gift splitting. If the donee (consenting) spouse does not have a Crummey withdrawal right over the gift property but does have a general power of appointment over all the gift property, the gift cannot be split. Treas. Reg. § 25.2513–1(b)(3). If the gift is not subject to withdrawal rights and the trust is a common “pot” trust from which the donee (consenting) spouse and the other beneficiaries may all receive distributions, the gift cannot be split because there are no readily ascertainable interests. See Rev. Rul. 56–439, 1956–2 C.B. 605; Kass v. Commissioner, 16 T.C.M. (CCH) 1035 (1957); and Wang v. Commissioner, 31 T.C.M. (CCH) 719 (1972). This is because the donee spouse’s and the other beneficiaries’ interests cannot be ascertained. If the trustee is directed (that is, “shall” in contrast to “may”) to make distributions under an ascertainable standard (for example, for the donee spouse’s health, education, support, and maintenance), the value of the third party (nonspouse) beneficiaries’ interests should be ascertainable. See TAM 9419007; Estate of Regester v. Commissioner, 83. T.C. 1 (1984); Rev. Rul. 79–327, 1979–2 C.B. 342 (which relate to taxable gifts upon the exercise of a limited power of appointment over a trust with ascertainable standards). In such an instance, that portion of the gift could be split with the donee (consenting) spouse. The amount of the gift that may be split is the value of the property transferred by the donor less the donee (consenting) spouse’s ascertainable interest in the property, which is a factual determination. See Falk v. Commissioner, 24 T.C.M. (CCH) 86 (1965).

Merely consenting to split gifts made in trust with the donor spouse does not make the donee (consenting) spouse, who is also a trust beneficiary, a transferor for purposes of the retained interest rules of Code §§ 2035–2038. Code § 2513(a)(1); PLR 200113030. Therefore, to avoid the Code § 2036 trap inherent when a Crummey trust income beneficiary transfers money to a Crummey trust (such as transfers by the grantor and the grantor’s spouse, who is also a Crummey trust beneficiary), only the grantor should make gifts to the Crummey trust, and any gifts of the grantor in excess of the Code § 2503(b) amount should be split with the spouse under Code § 2513.

Gift splitting is not appropriate when transferring an existing life insurance policy into a generation-skipping Crummey trust. If the transferor-grantor dies within three years of the transfer, the policy proceeds will be included in his or her estate under Code § 2035 (thus changing the identity of the transferor for GST tax purposes) and the spouse’s previously allocated GST exemption will be lost and wasted, resulting in an inclusion ratio of .50 (instead of 0). The better approach is not to gift split and instead to have the transferor-grantor allocate his or her GST exemption to the trust at the time of the initial transfer of the life insurance policy.

The amount available for withdrawal by a beneficiary should not depend on the donor spouse’s election to split the gift. PLR 8022048. Rather, the amount available for withdrawal should be based on the assumption that a married donor’s spouse will elect to split the gift amount, whether or not the election is made. PLR 8044080.

Beneficiary’s Lapse of a Crummey Withdrawal Right

As previously mentioned, Crummey withdrawal powers in an irrevocable trust convert a future interest gift into a present interest to qualify for the annual gift tax exclusion under Code § 2503(b). A Crummey withdrawal right is a general power of appointment. Code §§ 2514 and 2041. Extreme care must be used when inserting Crummey withdrawal powers in an amount greater than $5,000 or 5% of the value of the trust assets. Code § 2514(b) indicates that the exercise or release of a general power of appointment will be treated as a transfer by the individual who released the power. Under Code § 2514(e) a lapse of a power of appointment is considered a release. A specific exception to this rule is set forth under Code §§ 2514(e)(1) and (2), which state that the lapse of a power (and not a release or a waiver of the power) not exceeding $5,000 or 5% of the value of the assets out of which the power can be satisfied will not be treated as a transfer. What this means is that a lapse of a Crummey withdrawal right in excess of the “5 and 5” limitation will be treated as a transfer to the other trust beneficiaries by the Crummey withdrawal beneficiary. A lapsed withdrawal right within the “5 and 5” limits will continue to be treated as a transfer by the donor. A lapse in excess of the “5 and 5” statutory protection amount can cause disastrous estate, gift, and GST tax consequences. For example, if a trust was established with an initial gift contribution of $11,000, and the spouse was the only Crummey withdrawal right beneficiary and was given a $11,000 withdrawal right that lapsed, the spouse would be deemed to be the transferor of the amount of the withdrawal right in excess of $5,000, to wit, $6,000. In this example the spouse would be the deemed transferor of 55% of the trust assets ($6,000 excess ÷ $11,000 trust value) and because the spouse held a life interest in the trust, 55% of the trust assets would be includable in the spouse’s estate for federal estate tax purposes. Treas. Reg. § 20.2041–3(d)(4). Furthermore, the spouse would also be a transferor for GST purposes over the $6,000 and the grantor’s previously allocated GST tax exemption would be ineffective and wasted. This would require the spouse to allocate $6,000 of his or her GST tax exemption to maintain a zero inclusion ratio. Treas. Reg. § 26.2652–1(a)(5), Example 5. Because a lapse in excess of the “5 and 5” amount constitutes a taxable release by the holder of the power, it is usually best to limit a beneficiary’s right of withdrawal amount to the lesser of (1) the gift contribution amount or (2) the greater of the “5 and 5” amount. This will ensure that when the withdrawal right lapses it will fall within the safe harbor amount of Code § 2514(e). Without such a limitation on the amount of the withdrawal right, the lapse of the withdrawal right in excess of the “5 and 5” amount (absent a hanging right of withdrawal or the beneficiary having a separate trust share and holding a testamentary power of appointment over the amount of the withdrawal right in excess of “5 and 5” (Treas. Reg. § 25.2511–2(b) and PLR 9030005)) will constitute both a taxable release under Code § 2514(b) and an immediate gift of a future interest to the other Crummey trust beneficiaries. When the beneficiary dies, however, the assets subject to the taxable release that the beneficiary retained a power of appointment over (even a testamentary limited power of appointment) will be includable in the beneficiary’s gross estate. Code §§ 2038 and 2041(a)(2).

There are two ways to deal with the taxable release and gift over problem. The first is to establish initially separate trust shares for each Crummey trust beneficiary and give the beneficiary a testamentary limited power of appointment over his or her trust share or over the amount in excess of the “5 and 5” amount. This will prevent the lapsed amount in excess of the “5 and 5” limitation from being a completed gift to the other trust beneficiaries. Treas. Reg. § 25.2511–2(b); PLR 9030005. But the separate trust share coupled with a testamentary limited power of appointment will not avoid the taxable release problem of Code § 2514(e). Consequently, when the beneficiary dies, the assets over which the beneficiary retained a testamentary limited power of appointment (that is, the amounts in excess of the “5 and 5” limitation) will be included in the beneficiary’s gross estate under Code § 2041(a)(2). In addition, because the beneficiary has a retained  interest in the separate trust, all or a portion of the value of the trust share will be included in the beneficiary’s gross estate upon his or her death. Code § 2036(a); Treas. Reg. §§ 20.2041–3(d)(4). The effect of cumulative taxable releases with a retained interest by the beneficiary may result in all (or a significant portion) of the beneficiary’s separate trust share being included in his or her gross estate. Treas. Reg. § 20.2041–3(d)(5). Generally, this approach will work best in Crummey trusts in which (1) the grantor’s spouse is not a beneficiary, (2) the Crummey trust is not designed to be a long-term generation skipping dynasty trust, and (3) the beneficiary’s estate would most likely incur little or no federal estate tax (because of its modest size) if the beneficiary were to die before the termination of his or her interest in the Crummey trust. The second way is to allow the Crummey withdrawal right to continue with regard to any amount in excess of the “5 and 5” limitation. This is known as a hanging Crummey power (or hanging right of withdrawal).

Although the IRS has not favorably ruled on the use of hanging Crummey powers, the one ruling on this issue seems to suggest that if the hanging power is not drafted as a condition subsequent, it should be okay. PLR 8901004. A spouse should never be given a hanging Crummey power in a generation-skipping trust because the spouse’s power may be deemed to create an estate tax inclusion period (ETIP), which will prevent the grantor from allocating his or her GST exemption until the close of the ETIP.

The purpose of a hanging Crummey power is twofold: first, to permit larger trust contribution amounts that qualify for the annual gift tax exclusion amount, and, second, to avoid adverse estate and gift tax consequences under Code §§ 2514(b) and 2036(a) to the trust beneficiaries who hold Crummey withdrawal rights. This is achieved by having the beneficiary’s withdrawal right be a cumulative power of withdrawal that lapses every calendar year in the amount specified in Code § 2514(e)(1) and (2). If a beneficiary dies while possessing a hangin power that has not fully lapsed, the value of the unlapsed hanging power will be included in the beneficiary’s gross estate. Code § 2041(a)(2). The beneficiary will also become the (new) “transferor” for GST purposes, and the beneficiary’s executor may need to allocate GST tax exemption to the included amount. Fortunately, there are no gift tax consequences to a beneficiary while he or she holds a Crummey withdrawal right that has not yet lapsed.

Beneficiary’s Waiver or Release of a Crummey Withdrawal Right

Because a Crummey withdrawal right is a general power of appointment, a beneficiary’s waiver of the right of withdrawal constitutes a taxable release (and not a lapse) of a general power of appointment and constitutes a taxable gift of a future interest to the other trust beneficiaries. To avoid this adverse tax consequence the beneficiary should not waive the right to withdraw the trust contribution; rather, the beneficiary should merely permit the right of withdrawal to lapse. Also, a lapse of a beneficiary’s Crummey withdrawal right in excess of the “5 and 5” amount constitutes a taxable release of a general power of appointment and constitutes a taxable gift of a future interest to the other trust beneficiaries. To avoid this adverse tax consequence the beneficiary’s right of withdrawal should either be limited to the “5 and 5” amount or be subject to continuing lapse under a hanging power of withdrawal that lapses annually at the rate of 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, holds that only one “5 and 5” safe harbor lapse is permitted per calendar year per donee for all powers of withdrawal available to that donee during the year. Multiple withdrawal powers held by the same donee over the same or different trusts must be aggregated to determine whether or not they violate the “5 and 5” safe harbor amount. See also G.C.M. 39371 (1985).

Estate Tax Aspects of a Crummey Withdrawal Right

Retained Life Estate by Grantor

If the grantor is a beneficiary of the Crummey trust, a retained interest in the gifted property (for example, the grantor’s beneficial interest in the Crummey trust or the grantor’s right to vote [directly or indirectly] shares of a controlled corporation that the grantor has gifted to the Crummey trust) will result in inclusion of the trust property in his or her estate. Code § 2036 includes in a decedent’s estate any previously transferred property (for less than full and adequate consideration in money or money’s worth) in which the decedent retains for his or her lifetime the use or enjoyment of the income and/or corpus of the transferred property. Therefore, the grantor of the Crummey trust should not be a beneficiary of the trust. The rules of Code § 2036 apply both to the grantor and the Crummey trust beneficiaries. For example, if there is a taxable release of a Crummey withdrawal power and the beneficiary causing the release retains an income-for-life interest in the trust (or an interest that is otherwise ascertainable), the beneficiary has transferred property to the trust (to wit, the property subject to the taxable release) and has retained an interest in the released property for purposes of Code § 2036(a). In this instance the beneficiary is also a “grantor” of the Crummey trust and a portion (if not all) of the trust estate may be included in the beneficiary’s gross estate. See Treas. Reg. § 20.2041–3(d)(4). If the grantor’s spouse is a beneficiary of the Crummey trust, it is important that the spouse not make gift contributions to the trust (other than consenting to the splitting of gifts made by the grantor).

Deceased Beneficiary’s Lapse of a Crummey Withdrawal Right

If a beneficiary dies after his or her Crummey withdrawal right has lapsed within the “5 and 5” limits imposed by Code §§ 2514(e) and 2041(b)(2), the lapsed amount is not included in the beneficiary’s estate because the lapse does not constitute a taxable release of the power. Code §§ 2041(a)(2) and (b)(2).

Deceased Beneficiary’s Unlapsed Crummey Withdrawal Right

Although the termination of a Crummey withdrawal right during the power holder’s lifetime may not be a taxable release if the right of withdrawal (or rate of lapse under a hanging right of withdrawal) is limited under the “5 and 5” safe harbor rules of Code §§ 2514(e) and 2041(b)(2), if the power holder dies before the termination (that is, lapse) of the withdrawal right (whether it is a single right of withdrawal or a hanging right of withdrawal), the amount of the unlapsed right of withdrawal for the year of death will be included in the  estate of the holder of the power. Code § 2041(a)(2). In addition, the holder of the power will become the (new) “transferor” of the unlapsed power for GST tax purposes, and the GST tax exemption previously allocated by the grantor will be lost and wasted. Treas. Reg. § 26.2652–1(a)(2).

Deceased Beneficiary’s Waiver or Release of a Crummey Withdrawal Right

The gross estate of a decedent includes the value of property subject to a general power of appointment that was released or exercised before the decedent’s death if the result of the release or exercise is the creation of a retained interest described in Code §§ 2035, 2036, 2037, or 2038.  Code § 2041(a)(2). If a beneficiary waives his or her Crummey withdrawal right or allows his or her Crummey withdrawal right (which, as previously mentioned, is a general power of appointment under Code §§ 2514 and 2041) to lapse in an amount greater than the “5 and 5”safe harbor amount described in Code §§ 2514(e) and 2041(b)(2), the waiver or lapse of that Crummey withdrawal right will be treated as a taxable release of a general power of appointment for transfer tax purposes. In addition, the holder of the power will become the (new) transferor of the released power for GST purposes. Treas. Reg. § 26.2652–1(a)(2). The fact that the beneficiary holds a testamentary limited power of appointment over the property subject to the taxable release will not avoid inclusion of that property in the beneficiary’s gross estate. Code § 2041(a)(2). The testamentary limited power of appointment over the released property will prevent, however, the taxable release from being a completed gift (to the other Crummey trust beneficiaries) at the time of its release under Code § 2514(b). Treas. Reg. § 25.2511–2(b). If the Crummey trust provides the beneficiary with a lifetime income interest in the trust, an estate tax problem arises because the beneficiary has made a transfer (of the amount of the taxable release) with a retained life income interest in the trust property. Code § 2036(a). When the beneficiary dies, a percentage of the Crummey trust will be included in his or her gross estate. The percentage included will be based on a fraction—the numerator is the amount of the release and the denominator is the amount of the value of the Crummey trust at the time of the release. Treas. Reg. §20.2041–3(d)(4). Multiple or cumulative taxable releases are aggregated. Treas. Reg. § 20.2041–3(d)(5).

Executor’s Right to Recover Estate Tax Attributable to General Power of Appointment

The executor of a decedent’s estate is entitled to recover federal estate taxes paid by the estate that are attributable to property over which the decedent held a general power of appointment, and which property is included in the decedent’s gross estate. The executor’s right of apportionment/recovery is on a pro rata basis. A decedent can opt out of the recovery/apportionment provisions of this Code section by stating so in his or her will. A general provision in the decedent’s will to pay all taxes from residue will be sufficient to opt out of the Code’s apportionment/recovery scheme. Because a Crummey withdrawal right is a general power of appointment and may be included in a beneficiary’s estate under Code § 2041, who should be responsible for the federal estate taxes in such instance? The Crummey trust may be an unfunded and illiquid life insurance trust and unable to reimburse the beneficiary’s estate under the recovery rules of Code § 2207.

Executor’s Right to Recover Estate Tax Attributable to Grantor’s Retained Interest

The executor of a decedent’s estate is entitled to recover federal estate taxes paid by the estate that are attributable to property or interests in property that are included in the decedent’s gross estate under Code § 2036. The executor’s right of apportionment/recovery is on a marginal or incremental basis. A decedent can opt out of the recovery/ apportionment provisions of this Code section by stating so in his or her will or revocable living trust. Specific reference to Code § 2207A (or its provisions) in the decedent’s will or revocable living trust is required to opt out of the Code’s apportionment/recovery scheme. If the beneficiary releases the Crummey withdrawal right (which, as previously mentioned, is a general power of appointment) and retains an interest in the trust that is included in the beneficiary’s estate under Code § 2036, who should be responsible for the federal estate taxes? The Crummey trust may be illiquid and unable to reimburse the beneficiary’s estate under the recovery rules of Code § 2207B. Crummey trust property may be included in the grantor’s gross estate because the grantor retained the right to vote shares of stock described in Code § 2036(b). But which section of the Code applies for apportionment/recovery when the retained interest results in the life insurance proceeds being included in the grantor’s gross estate? Code § 2206 calls for pro rata reimbursement, whereas Code § 2207B calls for incremental reimbursement. A possible solution may be for the grantor’s will to require all apportionment/reimbursement under Code §§ 2206–2207B to be on an incremental basis.

To Be Continued

This article will conclude its discussion of the income and transfer tax aspects of Crummey demand powers in the March/April 2004 issue.

 

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