Crummey Powers: How Premium Gifts Qualify, and the 5-and-5 Trap

Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294
Last reviewed October 3, 2026 · Published October 3, 2026

Why the power exists

Gifts to a trust are normally future interests, which do not qualify for the annual exclusion (IRC 2503(b)). In Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), the court held that giving beneficiaries a real, temporary right to withdraw the gift makes it a present interest. Estate of Cristofani, 97 T.C. 74 (1991), allowed contingent beneficiaries such as grandchildren to hold powers too; the IRS still challenges "naked" powers held by people with no real interest in the trust.

How holders add room

Crummey room = $19,000 x donors x holders

2026 exclusion: Rev. Proc. 2025-32. Each holder must have a genuine interest in the trust.

The 5-and-5 problem

When a holder lets a withdrawal right lapse, the lapse is treated as a release of a power of appointment. A lapse is a gift by the holder only to the extent it exceeds the greater of $5,000 or 5% of the trust's assets (IRC 2514(e); IRC 2041(b)(2)). With a $19,000 power, up to $14,000 a year could be a taxable gift by your child to the other beneficiaries. Three common fixes, chosen by your attorney:

1. Limit each power to the 5-and-5 amount, accepting less exclusion room per holder.
2. Hanging powers: the excess over 5-and-5 does not lapse but carries forward, lapsing later as room allows.
3. Separate shares: each beneficiary's lapse only affects their own share, which removes the gift to others.

Designing the policy around the powers

Hans's point: the premium is the gift. A larger policy funded over 10 or 20 years keeps each year's premium inside the Crummey budget; a short-pay design concentrates gifts and uses lifetime exemption instead (which is fine if you have exemption to spare). Choose the pay period with the gifting plan, not after it. The annual exclusion and Form 709 · Crummey letters in practice.

Projected over the exemption, or own property in an estate-tax state?

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Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer

Frequently asked questions

Sources

1. 26 U.S.C. §2503 (taxable gifts; annual exclusion), Cornell LII
2. 26 U.S.C. §2514 (powers of appointment, 5-and-5 rule), Cornell LII
3. 26 U.S.C. §2041 (powers of appointment; 5-and-5 lapse), Cornell LII
4. Rev. Proc. 2025-32 sets the 2026 annual gift exclusion at $19,000 (sec. 4.42) and the basic exclusion amount at $15,000,000 (sec. 4.14, per OBBBA). The GST exemption is also $15,000,000. The noncitizen spouse annual exclusion is $194,000 (as of 2026-01-01)