Crummey Trust Gifts of LLC and Fund Interests: 2026 Tests

Why this page is about illiquid assets

Most Crummey explanations assume the trust gets cash. A parent who funds a trust with $19,000 a year in cash for each child is not the reader here. The reader is the owner of a stake in a private real estate LLC, a non-traded REIT or BDC, a DST interest or a fund, who wants to move some of it to a family trust each year at a discounted appraisal value and keep the gifts under the annual exclusion. Our annual gift tax exclusion page notes that the same operating-agreement terms that support a valuation discount can turn the gift into a future interest. This page tests that sentence against the documents. For the basics of why trusts use these powers at all, our ILIT guide and our guides to spousal lifetime access trusts and dynasty trusts cover the trusts themselves.

What the regulation says, and what it leaves out

The statute excludes “gifts (other than gifts of future interests in property)” up to the annual amount (26 U.S.C. 2503(b)). The regulation says what a future interest is. Here is the text next to what each part means for a trust.

Crummey: a demand “payable in cash immediately”

In Crummey the parents created an irrevocable trust for four children in 1962 and added $4,267.77 on June 20, 1962, $49,550.00 on December 15, 1962 and $12,797.81 on December 19, 1963. Each child could demand, up to and including December 31 of the year of the transfer, the lesser of $4,000 or the amount of the transfer, “payable in cash immediately upon receipt by the Trustee of the demand in writing”. The Ninth Circuit reversed the Tax Court on the two minor children and allowed the exclusions, on the basis that the demand could not be legally resisted.

Three facts in the opinion matter more for illiquid assets than the holding:

• The right was a cash right. The trust was funded with money, and the clause said it would be paid in cash on receipt of the demand. Nothing in the opinion addresses a demand for a share of an LLC that the manager can refuse to register.
• The window was short. The court noted that the large contributions came late in the year, so “the time to make a demand was severely limited”. A December 15 gift left 16 days to December 31, and a December 19 gift left 12 (our arithmetic). The court allowed the exclusions anyway.
• Nobody used it. The opinion records that no demand had been made and no distributions paid, and still treated the right as enough. The IRS’s later position adds notice and timing conditions, covered in the next section.

The IRS position: notice and a reasonable opportunity

The IRS has not published a regulation on withdrawal rights. Its position appears in Rev. Rul. 81-7, 1981-1 C.B. 474, which we could not obtain from the IRS in full text. The IRS’s own description of that ruling is in a private letter ruling we did save, PLR 199912016 (letter dated December 21, 1998). It describes Rev. Rul. 81-7 as holding that a withdrawal-right provision does not qualify a transfer as a present interest “unless the beneficiary has notice of the withdrawal right and a reasonable opportunity to exercise the power”. The letter then approved two trusts under which the trustee gives reasonable notice of each addition and the beneficiary has 30 days after notice to demand, on the stated condition that there is no “understanding or agreement, express or implied, that the withdrawal right will not be exercised”.

Two cautions about the source. A letter ruling is directed to the taxpayer who asked; the letter itself says that section 6110(j)(3) “may not be used or cited as precedent”. And it is 1998. We use it only as a statement of what the IRS said it required then. A drafting lawyer will read the later Tax Court memorandum decisions on notice (for example Estate of Turner, T.C. Memo. 2011-209), which we could not obtain in full text and therefore do not rely on here.

Where illiquid interests broke the exclusion

The cases that decided the fate of LLC and closely held stock gifts are not Crummey cases. They are about whether a donee of an interest can actually get anything out of it.

Hackl v. Commissioner (7th Cir. 2003). A retired businessman put tree farms worth about $4.5 million and about $8 million in cash and securities into an Indiana LLC and made annual gifts of voting and nonvoting shares to children, their spouses and a grandchildren’s trust. Under the operating agreement the manager “controlled any financial distributions, and members needed his approval to withdraw from the company or sell shares”; a transferee without consent received “the shares’ economic rights but not any membership or voting rights”. The LLC paid no distributions. The court held the outright gifts were future interests: the restrictions “meant that they were essentially without immediate value to the donees”. It added that “present interest” connotes “the right to substantial present economic benefit”, that restrictions common in closely held companies do not make such shares present interests automatically, and that the taxpayers carry the burden. The gift tax deficiency was roughly $400,000.

Stinson Estate v. United States (7th Cir. 2000). A gift of debt forgiveness to a corporation was a future interest to its shareholders because they “could not individually realize the increase without liquidating the corporation or declaring a dividend”, and the corporation’s bylaws required 67 percent of the stock and two-thirds of the directors to sell corporate property.

Neither case involved a withdrawal right. They show the test a court applies to a gift of a closely held interest: can the donee, acting alone, turn it into value now. A Crummey right is meant to answer yes by giving the beneficiary the power to demand. If the thing demanded is a unit that the manager can decline to transfer, or a non-traded REIT share whose repurchase is capped (see our repurchase rules page for 35 non-traded funds), the same question comes back. That conclusion is our reading, not a holding: no opinion we saved decides a Crummey right over an LLC interest.

Three ways to build the gift

The choices a drafting attorney weighs are these. The table is our reading of the sources above, not a recommendation.

What to read in the operating agreement or offering documents before choosing: whether a transfer to a trust needs the manager’s consent; whether a transferee is admitted as a member or gets economic rights only, as in Hackl; whether distributions are mandatory or at the manager’s discretion; whether units can be split into the amounts a $19,000 right needs; and, for a non-traded fund, whether shares can be re-registered to a beneficiary at all. Our census of real estate partnerships and LLCs in SEC Form D data shows how many holding vehicles share these features.

The 5-and-5 lapse math (our arithmetic)

If a beneficiary lets a withdrawal right lapse, the lapse is treated as a release of the power. Under 26 U.S.C. 2514(e) that release is a gift by the beneficiary only “to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds” the greater of $5,000 or 5 percent of the aggregate value of the assets out of which, or the proceeds of which, the exercise of the lapsed powers could be satisfied. The estate tax version, section 2041(b)(2), measures the value “at the time of such lapse”. The table runs a single $19,000 right (the 2026 annual exclusion) against trusts of different size.

The break-even is $19,000 divided by 0.05, or $380,000. Below it, each holder who lets a full $19,000 right lapse has made a deemed gift of the excess to the other beneficiaries (our reading of sections 2514(b) and (e)); that is the trust’s problem to design around, usually by drafting the right so it lapses only to the 5 and 5 amount, which we do not evaluate here.

Why a discount changes the result

A valuation discount lowers both the gift and the pool. Suppose the donor gifts LLC units with an undiscounted value of $400,000 and an appraiser applies a 24 percent discount for lack of control and marketability (an assumption for the illustration, not a market figure). The gift is appraised at $304,000, which at $1,000 per unit is 304 units, and each of four holders can demand 19 units for $19,000.

The point of the example is that the same discount that shrinks the gift tax value also shrinks the base against which the lapse is measured, so a trust funded only with discounted, illiquid interests is the one most likely to be under $380,000 (our arithmetic). The Instructions for Form 709 (2025) ask the donor to say “Yes” on Schedule A when a gift includes a discount for lack of marketability or a minority interest and to attach an explanation showing the amounts.

Annual exclusion capacity and the calendar

How much a trust can take each year without a taxable gift is the number of holders times $19,000 for each donor (our arithmetic): 3 holders give $57,000 per donor, and 6 holders give $114,000. Two donors giving separately double that.

Because the gift date fixes the exclusion year and the lapse date fixes the year in which the 5 and 5 amount is tested, a December gift with a 30-day window puts the gift in 2026 and the lapse in 2027 (our reading of section 2514(e), which tests lapses “during any calendar year”). The Crummey trust’s own window may be shorter or longer; the letter ruling approved 30 days after notice.

What a reader can do with this

What the documents let you check before talking to anyone:

• Read the transfer clause in the operating agreement or fund documents. Does a transfer to a trust need consent? Is the transferee admitted as a member, or is it an assignee of economic rights, as in Hackl?
• Read the withdrawal clause in the trust. Is the right payable in cash, in kind, or from any trust asset? What is the notice requirement, and how many days does the beneficiary have? Does the draft rely on a December 31 deadline, as in Crummey?
• Run the 5 and 5 test with your own appraisal. Use the discounted value of the units as the gift and add every other asset the right could be paid from. If the total is under $380,000 for a $19,000 right, the right is bigger than the safe harbor.
• Keep the paper trail. Notice dates and any demand or waiver letters, the appraisal and the Form 709 explanation of discounts. The Form 709 instructions list the trust’s EIN and terms, and a qualified appraisal or a detailed description of the valuation method, as part of adequate disclosure. Our Form 709 page for gifts of illiquid real estate interests walks through that return.

The decision, and who makes it. The trust instrument and the notice procedure are drafted by an estate-planning attorney; the appraisal of the units comes from a qualified appraiser; Form 709 and the lapse calculation are prepared by a CPA or the attorney. A financial adviser’s part is the liquidity question: if the trust must hold cash to make the withdrawal right real, where does that cash come from, and what does the family do if the LLC makes no distributions? Nothing on this page is a recommendation to make any gift.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 22, 2026: 26 U.S.C. 2041, 2503 and 2514 and 26 CFR 25.2503-3 and 25.2512-1 (Cornell Legal Information Institute copies of the current text); Rev. Proc. 2025-32 (irs.gov); Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), Hackl v. Commissioner, 335 F.3d 664 (7th Cir. 2003) and Stinson Estate v. United States, 214 F.3d 846 (7th Cir. 2000) (law.resource.org copies); IRS private letter ruling 199912016 (irs.gov); Instructions for Form 709 (2025) (irs.gov). Rev. Rul. 81-7, Cristofani v. Commissioner, 97 T.C. 74 and Estate of Turner, T.C. Memo. 2011-209 could not be obtained in full text and are not relied on beyond the IRS’s own description in the letter ruling. Valuation figures in the examples are assumptions and our arithmetic.