IRS has argued that if remote beneficiaries don't exercise their powers, it is evidence of a prior understanding. The courts have disagreed. Although excluded from the gift tax, such gifts do not qualify for exclusion from the Generation Skipping Transfer Tax . In such case, annual non-taxable returns may be filed to apply the exemption to the gifts, sheltering hopefully greater amounts that it will grow to. The latest legislative proposals would deny this exclusion from gift tax.
Nothing is ever simple.
In order to minimize taxes at all levels, good planning and drafting takes these limitations into account. Crummey powers are particularly useful in the case of irrevocable insurance trusts . They enable one to pay for tax-free insurance without using up one's lifetime shelter.