Crummey trusts are an important tool for estate practitioners looking to help their clients take advantage of the annual gift tax exclusion. Despite their relative popularity, Crummey trusts are sometimes challenged by the Internal Revenue Service (IRS).1 A recent U.S. Tax Court case, Mikel v. Commissioner2 reviewed the continuing viability of Crummey trusts when the trust contains an arbitration clause and an in terrorem clause. The decision is an important lesson and review for estate practitioners who utilize these types of trusts in their practice.
Utilizing Crummey Powers
Under federal tax law, individuals can give up to $14,000 a year to family or friends tax-free, provided the donee has a “present interest” in the money and can access the money right away. See Section 25.2503-3(b), Gifting Tax Regs. which defines a present interest as “an unrestricted right to the immediate use, possession, or enjoyment of the property or the income from property such as a life estate or term certain.”
