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Estate of Kohlsaat

    Brief Fact Summary. Decedent’s estate attempted to claim gift tax exclusions for a right given to contingent beneficiaries to demand payment. An audit of the tax return attempted to deny theses exclusions.

    Synopsis of Rule of Law. Contingent beneficiaries who have a right to demand payment of trust property, have a present interest in the property that will qualify the Decedent’s estate for a gift tax exclusion.

    Facts. Decedent prior to his death formed a trust as an irrevocable trust and transferred to the trust a commercial building owned by the decedent and managed for many years by various family members. Under the provisions of the trust, Beatrice Reinecke and peter Kohlsaat, the Decedent’s children, each received an interest in one-halfof the corpus and income of the trust. Each also received the special power to appoint the corpus of their share to his or her children or grandchildren. Beatrice and Peter and sixteen contingent remainder beneficiaries were given the right to demand from the trust an immediate distribution in an amount not to exceed $10,000, which such right lapsing 30 days after the transfer of property to the trust. This right was not exercised by any beneficiary. The Decedent’s estate attempted to treat the interest transferred to the sixteen contingent beneficiaries as qualifying for gift tax exclusions. An audit of the Federal estate tax return denied the exc
    lusions on the ground that the contingent beneficiaries did not hold a present interest in the trust.

    Issue. Whether the interest held by the contingent beneficiaries was a present interest in the trust thus qualifying for an annual gift tax exclusion?

    Held. Yes. The Contingent beneficiaries unrestricted rights to demand immediate distribution of trust property is a present interest in the property and thus qualifies for annual gift tax exclusions.

    Discussion. Even though there was an understanding that the beneficiaries would not exercise this right the Court found that the Decedent intended to benefit the contingent beneficiaries by giving them interest in the trust.


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