The Wealth & Wisdom Blog

The late comedian Bob Newhart was famous for his fictional one-sided telephone comedy routines. In the spirit of the Newhart one-sided telephone call, imagine the following one-sided call, heard from the perspective of a father calling his adult son.

Hi Son.  Yes, Dad here, how are you?

Great.  Good to hear.  Hey, listen, my attorney has told me that I need to send you a letter about this trust. 

Right, the trust I told you and your sister about at Christmas.   The letter will say that you can take out some of the cash from the trust. 

Except, yes, well, we don’t really want you to.

Yes, I know, but, well, we don’t really want you to actually take the money out.

Right, even though we are sending you a letter telling you that you can take it out.

Uh-uh. Uh-huh.  Yes. 

You said you want to know what other clear directions and wisdom I can impart to you today? 

In this month’s update, I explain the use of withdrawal rights within an irrevocable trust and provide factors to consider in deciding whether to use withdrawal rights in an irrevocable trust.

Gifts to Irrevocable Trusts

Irrevocable trusts are a great strategy for clients who seek to benefit children or grandchild for future specific purposes, control how gifted assets are managed until those purposes are accomplished in the meantime, and minimize estate taxes.¹ As summarized below, however, gifts to irrevocable trusts are not easily accounted for under the tax code.

Gifts to family members are characterized for tax purposes as either “annual exclusion” gifts or “taxable” gifts.

• Annual Exclusion Gifts. In 2025, you can give $19,000 per beneficiary per year as an annual exclusion amount To qualify, the gift must be an unrestricted current right to use the gifted assets, or what the tax code refers to as a gift of a “present interest.”²
• Taxable Gift. All other gifts to family members are “taxable” gifts.  The term “taxable” is misleading because it does not necessarily mean the giver pays taxes, only that a gift tax return must be filed to report use of federal unified credit amount.   Until total “taxable” gifts exceed the unified credit amount ($13,990,000 in 2025), no taxes are actually paid on a “taxable gift.”

A gift to an irrevocable trust that provides no withdrawal rights to a beneficiary would not qualify as an annual exclusion gift, since the gift is not a “present interest” gift.³ However, if the beneficiary is provided a right to withdraw assets contributed to the trust, the gift would be deemed a present interest gift.  In such an event, the gift would qualify as an annual exclusion gift.⁴ Please note that while the beneficiary is not actually required to withdraw any trust assets, the beneficiary must be notified of the withdrawal right.  Most irrevocable trust agreements provide the beneficiary with a limited time (e.g., 4 weeks after being notified in a letter) of a legal right to withdraw assets of up to the annual exclusion amount. At the end of this period, the withdrawal right expires.

When Not To Include Withdrawal Rights:

When withdrawal rights are implemented in an irrevocable trust, a trustee of an irrevocable is tasked with the administrative hassles of explaining the process, sending the notification letters to the beneficiaries, and keeping copies of the letters in every year in which gifts are made.  Therefore, I encourage our clients to consider whether a beneficiary should have withdrawal rights. ⁵ In deciding whether to provide a beneficiary a withdrawal right, the following factors weigh against providing a beneficiary a withdrawal right:

• Annual exclusion gifts are already being made through other gifts;
• A beneficiary has personal legal issues, such as creditor or divorce issues;
• The grantor wants to minimize the information being shared with the beneficiary;
• A low probability of estate tax liability at the grantor’s death;
• The beneficiary has a poor history of decision-making.

Our firm would be glad to have a two-way telephone conversation with you and/or your clients, either about withdrawal rights in irrevocable trusts, or about any other estate planning matter.

Notes:

¹ Among other benefits, the assets in the trust are protected from a trust beneficiary’s personal creditors and a divorcing spouse.

²  An annual exclusion gift must be a gift of a  “present interest.”  IRC §2503.

³  Gifts made directly to children or grandchildren will qualify for the grantor’s annual exclusion amount. No special notices ae required for direct/outright gifts.

⁴ This strategy was first developed following the 1968 court case in which it was successfully utilized, called Crummev v. Comm’r, 397 F.2^nd 82 (9^th Circ. 1968).

⁵ The irrevocable trust can be structured so that, on an annual basis, the donor decides ahead of the gift to the trust whether such gift is subject to the withdrawal right.