## Facts

- Israel and Erna Mikel, New York residents, created the IEM Family Trust in 2007 as an irrevocable inter vivos trust, naming their children, descendants, and spouses (about 60 beneficiaries, many minors) as beneficiaries; Salomon Mikel served as trustee.
- In June 2007, the Mikels transferred property to the trust valued at $3,262,000 total ($1,631,000 attributed to each spouse).
- The trust granted each beneficiary a time-limited withdrawal power (a Crummey-style demand right) exercisable for 30 days after notice of a contribution, limited in practical effect to the annual exclusion amount under I.R.C. § 2503(b) ($12,000 per donee in 2007).
- The trust required the trustee to provide notice of the withdrawal rights to beneficiaries (and guardians for minors); written notices were sent in 2007.
- The trust also included (i) a mandatory arbitration provision requiring disputes concerning the trust to be decided by a panel of three Orthodox Jewish arbitrators, and (ii) an in terrorem clause revoking a beneficiary’s interest if the beneficiary opposed or contested the trust’s distribution or filed an action in court.
- In 2011, each spouse filed a 2007 gift tax return reporting a $1,631,000 gift and claimed $720,000 of annual exclusions based on $12,000 present-interest gifts to each of 60 beneficiaries.
- The IRS disallowed the exclusions, asserting the gifts were future interests because the arbitration and forfeiture provisions made the withdrawal rights not legally enforceable, and determined for each spouse a gift tax deficiency and a late-filing addition to tax.

## Issues

1. Whether the 2007 transfers to the trust were gifts of present interests under I.R.C. § 2503(b) and Treas. Reg. § 25.2503-3 because beneficiaries held enforceable Crummey withdrawal rights.
2. Whether the trust’s arbitration clause and in terrorem clause rendered the beneficiaries’ withdrawal rights illusory, converting the transfers into gifts of future interests.

## Decision

- The Tax Court held that the transfers were gifts of present interests during 2007 to the extent of the beneficiaries’ withdrawal powers.
- The court concluded the beneficiaries’ withdrawal rights were legally enforceable under applicable state law and were not nullified by the arbitration or in terrorem provisions.
- The Commissioner’s motion for partial summary judgment was denied.
- The petitioners’ cross-motion for partial summary judgment was granted as to the present-interest/annual-exclusion issue, with other issues reserved.

## Legal Principles

- The § 2503(b) annual exclusion applies only to gifts of a “present interest,” defined as an unrestricted right to immediate use, possession, or enjoyment of property (Treas. Reg. § 25.2503-3).
- A properly structured, time-limited demand or withdrawal power after a trust contribution generally creates a present interest for annual-exclusion purposes, even if the trust otherwise provides for long-term administration.
- State law determines the nature and enforceability of property rights created by a trust, while federal law determines the resulting tax consequences.
- An arbitration requirement may supply an enforceable mechanism for vindicating beneficiary rights and does not, by itself, eliminate a present interest.
- An in terrorem clause will not be construed to defeat an expressly granted withdrawal right absent clear language that exercising or enforcing the withdrawal right triggers forfeiture.
- The present-interest analysis focuses on legal enforceability of the right, not on predictions about whether beneficiaries are likely to exercise it.

## Conclusion

The court treated the beneficiaries’ Crummey withdrawal powers as present interests qualifying for the gift tax annual exclusion, because the rights were substantively enforceable and the arbitration and forfeiture provisions did not eliminate or penalize the exercise of those withdrawal rights.


Mikel v. Commissioner, T.C. Memo. 2015-64, 109 T.C.M. (CCH) 1355 (2015)