By including withdrawal right in a trust, the grantor is able to make substantial transfers to the trust without any notable gift tax consequences. The major practical disadvantage of withdrawal rights is that one or more of the beneficiaries with withdrawal rights might choose to exercise them, thus removing propertyfrom the trust, causing difficulties for the trustees and thwarting the grantor's intent. While this is certainly their right, most beneficiaries realize that their withdrawal rights are part of a carefully designed estate plan, the purpose of which is to increase their inheritance. As a result, we find that withdrawal rights are rarely exercised.

Withdrawal rights and their lapse have certain tax disadvantages as well. For instance, any beneficiary who dies while in possession of an unlapsed withdrawal right will be required to include a portion of the Trust in his or her estate. This exposure is increased to the extent that the total gifts to the trust in any year exceed the 5 & 5 amount (i.e., the amount by which the withdrawal rights lapse). Under certain circumstances, even lapsed withdrawal rights may create estate tax issues at the time of the beneficiary's death. Tax and administrative issues associated with the exercise and lapse of withdrawal rights can be highly technical. Please feel free to contact us at any time with specific questions regarding the extent of a beneficiary's withdrawal right, or the nature of its lapse.