GCM 201208026 - Reserved Appointment Power Does Not Render Gift Incomplete

February 27, 2012

Summary

In GCM 201208026, a lawyer in the Chief Counsel's office advised that:

transfers to an irrevocable trust were completed gifts as to the term interest, despite the fact the transferors each reserved limited testamentary powers to appoint the remainder at the death of the survivor; and
withdrawal rights granted to the trust beneficiaries were "illusory," so additions to the trust would not be eligible for the annual gift tax exclusion.

Extended Summary

Husband and wife created the trust for the benefit of their children, more remote descendants, and their spouses. Their adult child, as trustee, was given unfettered discretion to make distributions among this class, or to charities. Each beneficiary was given a "Crummey" withdrawal right with respect to additions to the trust, calculated with reference to the annual gift tax exclusion for present interest gifts. However, the withdrawal right could be "voided" by the trustee.

At the death of the survivor of the husband and wife, in default of the exercise by either of them of his or her reserved limited testamentary appointment power, the trust remainder was to be distributed in equal shares to their two children.

The Chief Counsel's office determined the reserved limited testamentary appointment powers rendered the gift incomplete only to the extent of the amounts actually remaining in the trust at the death of the survivor. The gift of the "beneficial term interest" was complete, but it was not stated how this should be valued. The Memorandum also noted the trustee had discretion to distribute the entire trust at any time.

In concluding the Crummey withdrawal rights granted to the trust beneficiaries were "illusory," the Memorandum noted that in pursuing enforcement of their rights under the trust, the beneficiaries were required to resort to a specified forum other than the state courts. The trust document provided that if a beneficiary were to seek enforcement through a state court, he or she would forfeit all beneficial interests in the trust.

The Memorandum concluded under Section 2702(a)(2) the limited appointment powers retained by the transferors should be valued at zero, because they did not take the form of a noncontingent remainder following a fixed annuity or unitrust payout.

CPC Commentary

The Memorandum does not specify the nature of the "other forum," but it is possible this might refer to something like a Jewish beth din or an Islamic sharia court. The Memorandum specifically states that this "other forum" would not recognize state or federal law.

Regarding whether the gift was incomplete or not, Reg. Sec. 25.2511-2(b) seems to be contrary to the GCM, especially in the example:

"...if a donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee, and the donor retains a testamentary power to appoint the remainder among his descendants, no portion of the transfer is a completed gift."

However, the GCM addressed this regulation and came to a different conclusion!