White Paper

Lapse and Release Crummey Powers

 
A trap in using Crummey powers arises from the power’s lapse. A Crummey power is a general power of appointment. Because the Code categorizes the release of a general power of appointment as a taxable gift, without careful drafting of the trust instrument, the lapse of a withdrawal right may effectively give rise to the beneficiary donating a taxable gift to the trust. Code § 2514(b) provides that the exercise or release of a general power of appointment will be treated as a transfer by the holder of the power of appointment who released the power. Under Code § 2514(e) a lapse of a power of appointment is considered a release. An exception to this rule is set forth under Code § 2514(e)(1)(2) which provides that a 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. This means that a lapse of a Crummey withdrawal right in excess of the so-called “5 and 5 limitation” will be treated as a transfer to the other trust beneficiaries by the Crummey withdrawal beneficiary, while a lapsed withdrawal right within the 5 and 5 limits will continue to be treated as a transfer by the donor. As such, a lapse in excess of the 5 and 5 statutory protection amount can cause disastrous estate, gift and generation-skipping transfer (GST) tax consequences.

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Todd L. Denison is a Partner with Phelps Dunbar LLP. He represents individuals and business entities in the areas of business transactions and operations, partnership and corporate taxation, real and personal property transactions and trust and estates. Mr. Denison is a frequent speaker and has several publications.

Faculty

Todd Denison

Todd Denison

Phelps Dunbar LLP

Agenda

Faculty

Todd Denison

Todd Denison

Phelps Dunbar LLP

  • Partner with Phelps Dunbar LLP
  • Represents individuals and business entities in the areas of business transactions and operations, partnership and corporate taxation, real and personal property transactions, trusts and estates (including sophisticated estate) planning, charitable organizations (formation and operations), employee stock ownership plans and other qualified retirement plans, captive insurance, international transactions and taxation, tax controversies with the IRS, and elder law
  • Clients include a regional engineering firm, national advertising agency, regional construction firm, regional stone and interior design firm, and numerous family-owned businesses operating locally, regionally, and internationally
  • Frequent speaker and has several publications
  • Member of numerous professional and civic organizations
  • Achieved the highest rating with Martindale-Hubbell Law Directory
  • The Best Lawyers in America© (Woodward/White, Inc.), Business Organizations (including LLCs and Partnerships) in Mobile, 2019; Tax Law in Mobile, 2018-2019; Trusts and Estates in Mobile, 2018-2019
  • LL.M. degree, New York University School of Law; J.D. degree, University of Montana School of Law; M.A. and B.A. degrees, University of Montana
  • Can be contacted at 251-441-8206 or [email protected]

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