The Turner Decision:
Continue Doing Crummey Letters

The August 30, 2011 ruling in Estate of Turner v. [IRS] Commissioner has little impact on the requirement to maintain compliant Crummey-powered ILITs.

Two legal points in the Turner decision are of particular significance; what constitutes “notice” and whether “indirect” gifts could be excluded from gift taxes without a Crummey notice to the beneficiary.

Indirect Gifts
Provided that language in the trust document includes “indirect” gifts as a means of transferring property to the beneficiary, the right to withdraw is secured under that language. In the Turner case, the decedent paid the life insurance premium directly to the insurance company, not through the trust. This is considered an indirect gift from the grantor. Because the Turner trust documents provided for indirect transfers, this property was permitted to be transferred as a present interest gift, even though Crummey notices were not sent to the beneficiaries.

If a gift to fund the trust was never made, you might ask: “How can a beneficiary have a right to withdraw funds from a trust which has no funds (because it never took possession of the cash used to pay the premium)?” The trust owns the life insurance policy. Taken to an extreme for the purpose of this example, if the trust owned only a term life insurance policy (i.e. the policy had no cash value), the unused premium is considered by the IRS to be “value”—even if the insurance contract does not allow for a cash refund of this unused premium. It is this “value” which the beneficiary has the right to withdraw.

Notice
Regarding “notice,” citing the Cristofani case (an earlier case regarding Crummey-powered ILITs), the court noted that provided the beneficiary has the right to withdraw property, s/he does not also need notice to do so. That is, it is the right to withdraw which matters, not that the beneficiary was given notice of that right.

Under IRC §2041 the IRS would be able to tax property owned by an individual (read: beneficiary) even if the individual did not know s/he owned it. It follows that if that same person is entitled to the burdens of possessing the property, s/he is also entitled to the benefits from that property. The benefits include rights, regardless of whether the beneficiary is given notice s/he possesses them. That the IRS could tax you for property you never knew you owned is consistent with your not needing notice to exercise a right you already have.

Why Crummey Letters are Still Needed
• Most taxpayers choose not to sue the IRS. Reasons include the cost to litigate a challenge and not wanting to be in public opposition of the IRS. As a result, the IRS is often successful collecting taxes when it audits Crummey-powered trusts, if it finds incidents of noncompliance.
• There are eleven circuit courts (plus a circuit court in Washington, DC) based on geographic regions of the US and US territories and only one has issued a ruling in favor of the taxpayer on this subject. The IRS can pursue similar challenges case in ten other jurisdictions, possibly winning a contrary decision. In the event of a contrary decision by another US Circuit Court (to date this is the only circuit court decision on this matter), the US Supreme Court could decide to reconcile this issue. But any Supreme Court action could take years, if it occurred at all. And the lack of such a final decision on this matter leaves it suspect of being overturned.

Conclusion
While the Turner decision does provide a legal ruling to bypass the established Crummey process, it is not the final ruling they would be comfortable to follow (or on which to bet their tax liability). Given this uncertainty and that the opportunity to maintain a compliant trust expires at the end of each year, attorneys are recommending that their clients continue the established process, which is not challenged by the IRS.

Therefore, trustees should continue to follow established Crummey process conventions.

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