Lenders

Kids decide to buy a home. They ask mom to invest a large sum of money in the home in exchange for a percentage tenancy in common interest in the home. They agree to be wholly responsible for the loan, but mom of course agrees to pledge her 1/2 interest in the property to lender. Lender rather than being happy that they only have to lend a lesser percentage of the purchase price and acknowledging the investment status of mom, asks mom to write a gift letter. That’s right a gift letter stating that she has made a gift under oath. Now the tax lawyer in me says, “Whoa an investment in property in exchange for a percentage interest is not a gift.” But lender explains that certain governmentally supported lending agencies have “unwritten” rules that say that these types of transactions are treated as “gifts” for their paperwork purposes. So, I ask can I write a gift letter that basically says given that Lender is using the following definition of the word “gift” then Mom is making a gift. The answer back is of course “no”. Then tax lawyer asks will lender indemnify mom against any gift taxes that might be assessed by reason of having to sign this non-gift letter gift letter. The answer back is “no”. I find it interesting that a government back lender is requiring people to perjure themselves to effectuate a transaction that makes their loan more secure and is not a gift for gift tax purposes. Welcome to America.

Crummy without notice?

In the Estate of Turner v. Commissioner T.C. Memo 2011-209 (August 30, 2011), the Tax Court held that so long as the Grantor of an irrevocable life insurance trust grants a power of withdrawal to beneficiaries, the gift is an indirect present interest gift qualifying for the annual exclusion. The import of this ruling is that it extends the rule of Crummy to include gifts with a power of withdrawal where no written notice is given to the beneficiary.

So, let’s say Clyde and his wife Jewell creates an irrevocable life insurance trust. He buys a $3 Million policy and the annual premiums are $81,000 per year. He has three children who are beneficiaries of the trust upon his death. The trust grants the children the right to withdraw any gifts to the trust or for the benefit of the trust. Clyde decides to directly pay the life insurance premiums directly from the joint checking account with Jewell in lieu of paying some trustee to get the check and reissue a new check. No letters are sent to the beneficiaries informing them of their right to withdraw the premium monies from the trust. That should be a gift of a future interest, right? Wrong says the Turner decision. The court emphasized that the power to demand withdrawals after each direct and indirect transfer to the Trust was given to the beneficiaries in the Trust. The fact that some or even all of the beneficiaries may not have know of their right to withdraw is irrelevant. Thus, it is a present interest gift.

Why is that important? Each person has a right to give up to $13,500 per year per donee. This means that Clyde could give $13,500 to each of his children each year. It also means that Jewell could give $13,500 to each of her children each year (or any other individual that she wanted to give to). That means that Clyde and Jewell could give away $81,000 each year to their three children. This does not reduce the $5 Million each that they can give away when they die. In other words it’s a huge benefit to families trying to reduce estate taxes.

I’d still recommend giving the Crummy notices to the beneficiaries. This is but one Tax Court ruling and could be reversed, revised, distinguished or ignored. But at least if there is a mistake, you have at least one arrow to fire back when assessed a gift or estate tax.