Nov 1, 2006 12:00 PM, By Laura H. Peebles, director, Deloitte Tax LLP, Washington

By: By Laura H. Peebles, director, Deloitte Tax LLP, Washington

Perhaps no estate-planning tool is more subject to the law of unintended consequences than the ubiquitous Crummey¹ power. But, although there can be estate, gift and generation-skipping transfer (GST) tax consequences, it's the income tax impact that is most often overlooked. In some cases, these surprises do not become apparent until later, perhaps when a question arises regarding a trust's qualification as a subchapter S shareholder.

Simply put, a Crummey power is a general power of appointment. A powerholder has, at least temporarily, the right to the property subject to that power. Once that power has been released, assuming the powerholder still has certain rights or powers over the trust, Internal Revenue Code Section 678(a)(2) will treat the powerholder as the continuing owner of the trust property for income tax purposes.² This is true whether or not the value of the trust property will be excluded from the powerholder's gross estate;³ the powerholder is deemed to be a donor for gift tax purposes;⁴ and the powerholder is deemed to be the transferor for GST tax purposes.⁵

T&E Premium Content

To read the rest of this article, please login to our Premium Content section:

Registered Web Site Users
User Name:
Password:
Remember Me