Tuesday, April 07, 2015

Tax Court Says Bet Din Arbitration Clause In Demand Trust Does Not Destroy Gift Tax Exclusion

In Mikel v. Commissioner, (USTC April 6, 2015), the U.S. Tax Court held that a clause in a demand trust (a so-called Crummey trust)  providing that any disputes about its interpretation "shall be submitted to arbitration before a panel consisting of three persons of the Orthodox Jewish faith" (a beth din) did not prevent distributions under the trust from qualifying for the annual gift tax exclusion.

Under the trust, 60 children and grandchildren of the husband and wife creating the trust had the right to demand a distribution of $24,000 per year. Trustees could also make additional distributions.  The trust provided that any beneficiary who filed an action in a court of law challenging a distribution would lose his or her benefits under the trust.  The IRS had contended that these provisions prevented the beneficiaries from receiving a "present interest in property"-- the requirement for the gift tax exclusion-- because as a practical matter the right to the distributions were not legally enforceable in court. The Tax Court disagreed concluding first that the right to a distribution would be enforceable before a bet din, and secondly that the clause discouraging court actions applies to discretionary distributions by the trustees, not annual demand amounts. BNA Daily Tax Report (subscription required) reports on the decision. [Thanks to Steven H. Sholk for the lead.]