Crown, Crummey, and Lender.
These three rather curious names relate to tax cases that have become shorthand for tax techniques that did or did not work.
Crown or Crown Loans, refer to loans made by Henry Crown who loaned his children $18 million at no interest. At the time there was no gift tax or income tax effect. The IRS did not like this but lost in court. It was such a great technique and so popular that congress changed it in the Tax Reform Act of 1984 with the enactment of the below-market interest rate (imputed interest) rules.
Crummey Trust Letters, or Crummey Letters, are named after Clifford Crummey. To have a gift qualify for the annual gift tax exclusion, it must be a gift of a “present interest.”
Therefore, a gift to a trust may not qualify. A Crummey provision in a trust agreement provides for the beneficiary to have a withdrawal right of gift. This is generally documented by having the trustee notify the beneficiary of his right to withdraw the funds by sending him a letter notifying him of the right thereby making it qualify for the annual exclusion.
Lender or Lender Management (the family office) is named after Harry Lender, the founder of Lender Bagels. Since the deduction of investment management fees under Section 212 were limited by Section 67 to 2% of AGI for individuals and trusts, costs for managing one’s portfolio of investments are severely limited or eliminated. By extension, this has effectively eliminated the deduction by a family office of expenses by having them be categorized as either personal or investment management related expenses. However, ordinary and necessary business expenses are still deductible under Section 162. Lender Management was structured in a particular way to handle investments including structuring investment partnerships for certain members of the family. Son Keith was an employee and CIO of the office. To jump to the conclusion, based on this set of facts, the court allowed the deduction of all the family office expenses to be deducted under Section162. Based on this case, there appear to be several family offices that are structuring their organizations to fit under the Lender decision and therefore, deduct all of the family office operating expenses.
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Forgot to send out Crummey letters? Don’t panic. In the last FBO Bulletin we discussed some tax shorthand phrases one of which was Crummey as in Crummey Letters. This deals with the contributions to trusts that establish the gift as a present interest (often using the precious $18,000 annual exclusion). If this does not affect you and ring a bell you may want to stop reading now but if it does read on. Nearly all professional advisors recommend sending out the Crummey letters on a regular, consistent, and timely basis and we recommend the same. The practice of sending out the letters is well accepted for gifts to trusts of all kinds and is seen often with Irrevocable Life Insurance Trusts (ILITs). The problem is that from an administrative standpoint it is burdensome and attending to the details often get overlooked as time and attention gets diverted with the niggling details of life. If that is the case and you have not sent the Crummey letters as you should have – we say don’t panic. There are several things that can be done to remedy the matter somewhat retroactively. Even if those do not work if the letters have not been sent there is a substantial position that there is no requirement for written notice at all. This argument, as with most tax matters, gets technical, doesn’t always work but does have support to give one comfort. In conclusion, it is general practice that Crummey letters be sent out but if they have not been, check with your professionals to review your situation with care. FBO is a multi-family office focused exclusively on providing, accounting, tax, and administration of financial matters for UHNW individuals and families. It does not offer Investment Management Services FBO Services, Inc. 2011 Renaissance Boulevard, Suite 102, King of Prussia, PA 19406-2782 610-272-0800 email:
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