## Facts

- Lieselotte Kohlsaat created an irrevocable family trust on March 27, 1990, and transferred to it a commercial building valued at $155,000; no additional contributions were made.
- The decedent’s two adult children, Beatrice Reinecke and Peter Kohlsaat, served as co-trustees and primary beneficiaries, each holding rights in one-half of trust income and corpus and a special power to appoint that half to their descendants.
- The trust named 16 contingent beneficiaries: Beatrice’s three children and eight grandchildren, and Peter’s spouse and four sons.
- After the transfer, Beatrice, Peter, and each contingent beneficiary received a right for 30 days to demand an immediate distribution from the trust up to the amount of the annual exclusion under I.R.C. § 2503(b) (a “Crummey” withdrawal power).
- Beneficiaries were timely notified of these withdrawal rights shortly after the transfer; none exercised the rights.
- The IRS determined an estate tax deficiency of $337,474 after disallowing annual gift-tax exclusions claimed for the 16 contingent beneficiaries on the ground that their interests were future (not present) interests.
- The estate petitioned the Tax Court; after other issues were resolved, the only remaining issue was whether the transfer generated an annual exclusion for each of the 16 contingent beneficiaries.

## Issues

1. Whether the 16 contingent beneficiaries’ 30-day, legally enforceable withdrawal rights constituted “present interests” for the annual gift-tax exclusion under I.R.C. § 2503(b), despite their underlying beneficial interests being contingent and despite an alleged expectation that the rights would not be exercised.

## Decision

- The Tax Court ruled for the estate.
- The court held that each contingent beneficiary’s unrestricted right to demand an immediate distribution from the trust for a limited period after the transfer constituted a present interest.
- The transfer qualified for an annual exclusion under § 2503(b) for each of the 16 contingent beneficiaries, and the Commissioner’s contrary determination was rejected.

## Legal Principles

- The § 2503(b) annual exclusion applies only to gifts of present interests, defined as an unrestricted right to immediate use, possession, or enjoyment of property or income.
- A beneficiary’s legally enforceable withdrawal power over contributed trust property can create a present interest even if the beneficiary’s other trust interest is a contingent remainder.
- A withdrawal right does not lose present-interest status merely because it is not exercised or because there is an informal expectation within a family that it will not be exercised, so long as the right is genuine, unrestricted, and properly communicated.

## Conclusion

Contingent trust beneficiaries who receive timely notice of a real, enforceable, short-term right to withdraw contributed trust property hold present interests for § 2503(b), allowing separate annual exclusions for each such beneficiary even when their remainder interests are contingent and the withdrawals are unlikely to occur.


Estate of Kohlsaat v. Comm’r, T.C. Memo. 1997-212 (1997)