Withdrawal Powers Options in a Washington Irrevocable Gift Trust

The threshold decision of whether to include withdrawal rights at all is made earlier, on the Trust Design tab. This article covers the Withdrawal Rights section of the Trust Features tab, which determines the particulars of the withdrawal rights the trust grants.

What Are Withdrawal Rights?

Withdrawal rights (often called “Crummey powers,” after Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)) give a beneficiary the right, for a limited period after a gift is made to the trust, to withdraw that gift.

That right of immediate access is what allows a gift to an irrevocable trust to qualify for the federal gift tax annual exclusion under IRC § 2503(b). Without it, a gift to an irrevocable trust is a gift of a future interest, which does not qualify for the exclusion. The window to exercise the withdrawal right is generally time-limited.

When designing a trust with withdrawal rights, consider the gifting plan for the entire life of the trust. Does the grantor need to use the gift tax annual exclusion when transferring assets to the trust? Will the trust receive frequent gifts that also depend on the annual exclusion? If not, the withdrawal amount can be smaller, which avoids much of the complexity these rights can introduce. But if the grantor (or grantors) need the full annual exclusion, then planning for the lapse (what happens when a beneficiary does not exercise a withdrawal right) becomes a central design issue, and the decisions on this tab follow from it.

What This Tab Determines

When withdrawal rights are included, the Trust Features tab presents a Withdrawal Rights section that controls how those rights are designed in the trust you are drafting. The options are:

1. The size of each beneficiary’s withdrawal right (the “withdrawal amount”)
2. The length of the withdrawal window
3. What happens to a right that is not exercised before it expires (the “lapse”)

Note that the beneficiaries who hold withdrawal rights are set by the trust’s beneficiary structure on the Current Beneficiary tab, and the trust document includes a provision allowing a transferor to exclude any beneficiary from having a withdrawal right over a particular contribution. A withdrawal right should generally not be given to a special needs beneficiary, since the right itself can be a countable resource for needs-based public benefits.

Why the Amounts Matter: Exercise, Lapse, and the 5-and-5 Rule

The amount of a gift that qualifies for the annual exclusion may be the most important issue to the grantors, but that withdrawal amount, and specifically the portion that lapses, carries some tax risks to the beneficiaries worth considering. There are a few ways to balance the grantor’s annual exclusion amount, the beneficiary’s lapse exposure, and the corresponding income, gift, estate, and GST tax consequences.

Withdrawal Amounts Set Annual Exclusions for Grantors

The withdrawal right is what makes a gift to the trust a present interest, so it is the feature that qualifies the contribution for the grantor’s gift tax annual exclusion under IRC § 2503(b). The size of each beneficiary’s withdrawal right sets how much of the grantor’s gift qualifies: a contribution qualifies for the annual exclusion only to the extent the beneficiary can withdraw it, and any part of a beneficiary’s share that exceeds their withdrawal right is a gift of a future interest that does not qualify.

That qualifying amount is limited to the annual exclusion the grantor actually has available for that beneficiary. The exclusion is measured per donor, per beneficiary, per year; it is reduced by other gifts the grantor has already made to the same beneficiary that year (including withdrawal rights created for that beneficiary earlier in the year), and an unused exclusion does not carry forward. A married grantor who elects to split gifts with a spouse under IRC § 2513 has up to two annual exclusions available for each beneficiary.

Lapsing Triggers Gifts By the Beneficiaries

A withdrawal right in the hands of a beneficiary is a general power of appointment under IRC § 2514(c). A beneficiary who does not exercise a withdrawal right allows it to “lapse,” and letting a general power of appointment lapse is treated as the beneficiary having made a gift of the lapsed amount under IRC § 2514(b). It is possible that a trust beneficiary is treated as having made an indirect gift to the trust’s other beneficiaries, whose shares are enlarged by the amount the beneficiary chose not to take, every time an unexercised withdrawal right lapses. And because that beneficiary’s gift is a gift of a future interest, the beneficiary treated as making it cannot use their own annual exclusion to shelter it.

The 5-and-5 "Safe Harbor" Rule (IRC § 2514(e))

The lapse of a withdrawal right in a given year is NOT treated as a transfer by the beneficiary to the extent the amount lapsed does not exceed the greater of $5,000 or 5% of the assets out of which the withdrawal right could have been satisfied. Any part of a lapse above that protected amount is treated as the beneficiary’s transfer. The $5,000 figure is fixed by statute and is not adjusted for inflation.

Two features of that protected amount drive everything else:

• The 5% is measured against the assets the withdrawal right can reach, not necessarily the whole trust. If a trust is a pot trust, a beneficiary’s right can typically be satisfied from the entire trust, so the 5% safe harbor amount is 5% of the trust. If a contribution is made instead to a trust divided into separate shares, the withdrawal right is satisfied from that beneficiary’s own share, so the 5% safe harbor amount becomes 5% of that share.
• The protected amount is small until the trust is large. Because the denominator is one beneficiary’s reachable pool, 5% only exceeds the $5,000 floor once that pool exceeds $100,000, and it does not cover a full annual-exclusion-sized lapse until the pool reaches roughly twenty times the exclusion amount (about $380,000 at a $19,000 exclusion). In many trusts, for years, the protected amount is effectively the flat $5,000.

The gap between an exclusion-sized withdrawal right and the small amount the tax law protects at lapse is the tension the options below resolve in different ways. It is not a flaw in the statute to draft around; it is the reason the different lapse mechanisms exist.

Drafting Decision 1: How Much Can Each Beneficiary Withdraw?

Both options limit each beneficiary’s withdrawal right to that beneficiary’s share of the gift. They differ in the ceiling placed on that right.

Up to the Annual Exclusion Amount

Each beneficiary may withdraw the lesser of:

• Their share of the contribution, and
• The federal gift tax annual exclusion available to the donor for that contribution (accounting for gift-splitting where the donor is married, and reduced by rights already created for that beneficiary earlier in the same year).

The full amount of each contribution that falls within the annual exclusion qualifies for the exclusion. Because the resulting right usually exceeds the 5-and-5 protected amount, selecting this option presents the second decision below.

Example. A trust for three children; the donor gives $57,000. Each child’s share is $19,000, within a full annual exclusion, so each child may withdraw $19,000 and the donor’s entire gift qualifies for three annual exclusions.

Up to the Greater of $5,000 or 5% of the Trust or Share

Each beneficiary may withdraw the lesser of their share of the gift, the annual exclusion available to the donor, and the greater of $5,000 or 5% of the assets out of which the right could be satisfied, measured at the time of the gift. Because the right can never exceed the protected amount, a right that is not exercised simply expires with no further consequence. No lapse follow-up appears, and no ongoing recordkeeping is required. The trade is deliberate: smaller exclusion coverage in exchange for complete simplicity. As the trust grows, the 5% figure rises, and once the reachable assets exceed roughly twenty times the exclusion amount, this option covers a full exclusion and the trade disappears.

Example. Same trust, worth $200,000; same $57,000 gift to three children. Each child’s 5-and-5 amount is $10,000 (5% of $200,000, which beats $5,000). Each child may withdraw $10,000, so $30,000 of the $57,000 gift is covered by withdrawal rights and the balance does not qualify for the annual exclusion.

Drafting Decision 2: How Does the Excess Lapse?

When the right is the full annual exclusion amount, it can exceed the 5-and-5 protected amount, and the excess must be handled so the lapse does not become a gift by the beneficiary. There are three choices, and the drafter picks one every time. There is no default. Each states its true consequence.

Hanging Power (Only the Safe Amount Lapses Each Year)

On each lapse date, the beneficiary’s accumulated rights lapse only up to the protected amount; the excess carries forward and lapses in later years as each year’s protection absorbs it. No amount is ever treated as a completed gift, and nothing is added to the beneficiary’s taxable estate on account of the lapse. The cost: the unlapsed balance must be tracked, it remains reachable by the beneficiary’s creditors while outstanding, and it is included in the beneficiary’s estate if the beneficiary dies while a balance remains. In years when no gifts are made, the protected amount continues to reduce the carried-forward balance. Hanging works in every trust structure and needs no power of appointment.

Example. Trust worth $200,000 (protected amount $10,000 a year), one child, two $19,000 gifts made December 31, 2026 and January 1, 2027. Both full exclusions are captured when the rights arise. The child’s balance reaches $38,000, then lapses $10,000 each year: $28,000 remains after the first lapse date, then $18,000, $8,000, and $0. No lapse in any year exceeded that year’s protected amount, so the child never made a taxable gift.

Full Lapse, Protected by the Beneficiary’s Power of Appointment

The right lapses in full on each lapse date, and the beneficiary holds a testamentary power of appointment over the trust property. That retained power keeps the lapse from being a completed gift during life (it is an incomplete gift). Instead, the property over which the lapsed right could have been exercised, including its later growth, is included in the beneficiary’s own gross estate at death. There is no balance to track and no lifetime gift.

This option is fully effective only where the withdrawal holder actually holds that power of appointment. In this product that means a single named beneficiary with the power of appointment turned on (set on the beneficiary-terms tab). Where a holder does not hold the power, a full lapse produces the beneficiary-gift result described next; the document follows the selection and the interview flags it.

Full Lapse, Beneficiaries Make Gifts When the Right Lapses

The right lapses in full on each lapse date with no power of appointment behind it. Each beneficiary is treated as making a taxable gift of the amount above the protected amount. It captures the full exclusion with no tracking and no power of appointment. It is offered as a deliberate choice, not as a default.

In a trust that will divide into separate shares (for example, at the grantor’s death), a hanging balance built up while the trust was a single fund afterward burns down against the smaller share, so a large balance outstanding at the division can take years to clear. The terms of these mechanisms are built into the trust language; this tab records which one applies.

Which Lapse Options Fit Which Trust Structure

Whether “full lapse protected by a power of appointment” is fully effective depends on whether the beneficiaries who hold the withdrawal rights actually hold a power of appointment at the time a right lapses. Hanging and the safe amount fit every structure.

Two structural points explain the entries above:

• Individual plus descendants. The descendants are also withdrawal holders, but the power of appointment is granted to the primary individual, not to the descendants. So a full lapse cannot be an incomplete gift for the descendants; for them it is a gift. Choosing “full lapse protected by a power of appointment” for this structure produces a genuine full lapse where the beneficiaries make gifts, and the interview says so.
• Class or pot trust. The members’ powers of appointment come into existence only after the pot divides into separate shares. The withdrawal rights arise and lapse while the money is still in the shared pot, before any member has their own share and power. So a full lapse in a class trust means the beneficiaries make gifts. Both pot variants reach the same result: the age-based pot divides at a set age, and the lifetime pot divides at the grantor’s death, but in both the withdrawal activity happens during the pot phase.

When Rights Lapse: the Later-of Date

The exercise window and the lapse date are separate. The beneficiary may exercise the right within the exercise window (30, 45, or 60 days) after the gift is made to the trust. The unexercised portion then lapses on the later of (a) the last day of the exercise window, or (b) January 31 of the year following the year of the gift.

That rule does two jobs. Fixing the lapse to the following January 31 keeps each year’s gifts metered to their own lapse year: a gift made December 31 lapses the following January 31, while a gift made the next day, January 1, lapses a full year later, so gifts made in different calendar years never compete for the same year’s 5-and-5 protection. And the “later of” guarantees a full exercise window even for a gift made at year end: if the window runs past January 31, the right does not lapse until the window closes.

Example. A donor gives $19,000 on December 31, 2026 and another $19,000 on January 1, 2027, using two years’ annual exclusions. The first right lapses January 31, 2027 (the window closed well before then); the second lapses January 31, 2028. Each lapse is tested against its own year’s protected amount.

Why the window runs from the transfer. For a gift in trust to qualify for the annual exclusion under IRC § 2503(b), the beneficiary’s opportunity to withdraw must be immediate; a delay between the transfer and the beneficiary’s ability to exercise can turn the gift into a future interest. For that reason the exercise period is measured from the transfer itself, not from whenever notice happens to reach the beneficiary. The IRS requires that the beneficiary have actual knowledge of the right and a reasonable opportunity to exercise it, but it does not require written notice. Writing is simply the best evidence. This is a drafting choice on which practitioners take differing approaches. Review the Henderson outline (Section VI) and the other authorities under Further Reading, and satisfy yourself of the approach before relying on it.

Protections Built Into the Trust Language

These provisions apply automatically whenever withdrawal rights are included; they are not options:

• Notice. The Trustee gives notice of each gift and the resulting right by any means reasonably designed to give the beneficiary actual and timely knowledge of the right, and should keep contemporaneous evidence that notice was given. A beneficiary’s right of withdrawal, and the period for exercising it, arise from the transfer itself and are not contingent on notice. Writing is the best evidence and is recommended, but it is not required: no gift will fail solely because notice was not in writing, provided the person entitled to receive it in fact had actual, timely knowledge of the right. A standalone, re-runnable Notice of Withdrawal Right template in the Other Trusts Library generates and documents each notice as contributions are made; any acknowledgment it includes confirms receipt only and does not waive the right or future notices.
• Minors and incapacitated beneficiaries. Notice goes to, and the right may be exercised by, the beneficiary’s guardian or conservator, or, for an incapacitated adult, an agent under a power of attorney that expressly grants the authority. The donor may never exercise a right on a beneficiary’s behalf.
• Creditor events. If a beneficiary enters bankruptcy or a similar proceeding, their right becomes non-exercisable and its lapse is paused until the proceeding ends. The right is frozen rather than forced to lapse, and no bankruptcy trustee may exercise it.
• Coordination with other provisions. No trustee power to withhold or redirect distributions, and no other person’s power of appointment, applies to property subject to an unlapsed withdrawal right, and the Trustee must keep sufficient liquid assets to satisfy outstanding rights.
• Donor flexibility. A donor may, in writing at the time of a gift, exclude any beneficiary (or any portion of the gift) from withdrawal rights for that gift.

A Note on Income Tax and S Corporation Stock

Withdrawal rights also have an income-tax dimension separate from the gift-tax rules above. Under IRC § 678(a), a beneficiary who holds a withdrawal right can be treated as the income-tax owner of the portion of the trust they could withdraw. Section 678(b) provides that this does not apply while the trust’s grantor is treated as the income-tax owner under the grantor-trust rules. The point becomes relevant mainly after grantor-trust status ends, and where a right has lapsed but not fully (an unlapsed hanging balance), the beneficiary may be a partial owner of the associated property under § 678.

This interacts with a trust’s eligibility to hold S corporation stock, where every owner must be a permitted shareholder. A trust that holds or may come to hold S corporation stock should be reviewed for this specific issue.

Further Reading

The following are freely available discussions of Crummey withdrawal rights, provided for background and further research. They are not a substitute for case-specific legal or tax advice, and some predate current exclusion amounts. Attorneys are encouraged to review these and other authorities and reach their own conclusions.

• Nancy G. Henderson, What You Thought You Knew About Crummey Powers (2012) (PDF)
• Griffin Bridgers, Five by Five Powers Versus Crummey Withdrawal Rights (2023)
• Griffin Bridgers, Lapse Limitations of Crummey Powers: Some Common Errors (2025)

This article explains options within the drafting software. It is general information for the drafting attorney, not legal or tax advice, and does not create an attorney-client relationship. The drafting attorney is responsible for the tax and legal consequences of the options selected.