Aug 1, 2011 12:00 PM

Effectively advise beneficiaries of their withdrawal rights to prevent maximum amounts of trust contributions from being subject to gift tax

By Andrew M. Katzenstein & Lindsay R. Sellers

Estate planning practitioners regularly include some form of withdrawal rights in irrevocable trusts, exercisable with respect to a specific amount and for a limited period of time, to enable the trust's donor to use his Internal Revenue Code Section 2503(b) annual exclusion from gift tax for contributions to the trust. A withdrawal right must be included to provide the beneficiary with a “present interest” in the gift. By providing the withdrawal rights, all practitioners want to ensure that the maximum amount of each contribution isn't subject to gift tax. But the methods practitioners use to both create and administer withdrawal rights vary widely.

To determine whether practitioners use one set of procedures most often in administering trusts subject to withdrawal rights, we posted an inquiry on the American College of Trust and Estate Counsel (ACTEC) listserv asking participants to briefly describe how they ordinarily direct trustees to give notice to beneficiaries of their withdrawal rights. From the initial responses, it was apparent that the notice procedures varied greatly among practitioners. Michael D. Whitty of Chicago's Vedder Price then turned the inquiry into a web survey. Seventy-six ACTEC members responded to the survey. The results showed that: (1) 62 percent of the responding members have trustees send written notice of withdrawal rights to each beneficiary and request that the beneficiary acknowledge receipt of the notice in writing, but don't request an affirmative waiver of the withdrawal right by the beneficiary, (2) 30 percent have trustees send written notice to each beneficiary, but don't request acknowledgement or waiver by the beneficiary, (3) 5 percent have trustees send written notice to each beneficiary and request both acknowledgment and waiver from the beneficiary, and (4) 3 percent send a one-time written notice to each beneficiary with a prospective, permanent but revocable, waiver of his withdrawal rights. Some respondents also provided the rationale behind their selection, for example, that they request acknowledgment of notice from a beneficiary as a way to provide a record of notice for the file or alternatively that they specifically don't request acknowledgment of notice because it may “raise eyebrows” at the Internal Revenue Service if a signed acknowledgment is never returned. Several respondents noted that they don't request an affirmative waiver of a withdrawal right because it would be treated as a release, leading to unintended gift tax consequences.

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

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50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

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