January 01, 2004

Income, Gift, and Estate Tax Aspects of Crummey Powers After the 2001 Tax Act: Part 1 (2004, 18:01)

Income, Gift, and Estate Tax Aspects of Crummey Powers After the 2001 Tax Act: Part 1

Probate and Property. January/February 2004, Volume 18, Number 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tax applicable exclusion amount remains frozen at the $1 million level (even if the estate and GST tax is permanently repealed), grantors will want to use their available annual exclusion amount under Code § 2503(b) before using their $1 million gift tax applicable exclusion amount.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.


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