Question

When funds are deposited to the trust, the beneficiaries are to be notified of their right to withdraw the contribution for a period of 30 days. If they do not request a withdrawal in writing within 30 days of their notification, their power to withdraw lapses and the trustee may invest the funds as they see fit. This is an example of a:

a. Spendthrift provision.
b. Limited power of appointment.
c. Crummey power.
d. Five by five power.

Answer 1

The correct answer to the scenario provided is 'Crummey power,' which allows funds to qualify for the annual gift tax exclusion by giving beneficiaries a present interest in the trust. Hence, option (c) is correct.

Step-by-step explanation:

When funds are deposited into a trust, and the beneficiaries are notified of their right to withdraw the contribution for a specified period, such as 30 days, and they fail to do so within that time, the right lapses. This arrangement provides beneficiaries a present interest, allowing funds to qualify for the annual gift tax exclusion despite the trust itself being a future interest. This mechanism is known as a Crummey power.

It is neither a spendthrift provision, which protects trust assets from creditors, nor a limited power of appointment, which allows a beneficiary to determine who receives the trust property. It also differs from a five by five power, which involves the beneficiary's right to withdraw the greater of $5,000 or 5% of the trust annually.