CRUMMEY TRUST: Definition & How To Use It

crummey trust
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Setting up a trust may be on your estate planning to-do list if you want to safeguard your fortune for future generations while perhaps reaping tax benefits. A Crummey trust is a form of trust that can be used to avoid gift taxes when transferring assets to underage children or anybody else. Although this sort of trust is less prevalent than others, understanding how it works will help you decide whether you should use one.

What is the Crummey Trust?

A Crummey trust permits the creator to distribute assets to beneficiaries free of both gift and estate taxes. It is named after the 1968 court case Crummey v. Commissioner. In most cases, grantors give gifts to beneficiaries in excess of their yearly gift tax exclusion.

What is the Annual Gift Tax Exemption?

Americans can already give up to $15,000 per year to any individual recipient without paying gift tax. The amount of the annual gift tax deduction fluctuates on a regular basis. There is no limit to the number of persons who can receive a $15,000 annual gift. For example, if you have five children and ten grandkids, you can give each of them a $15,000 gift each year without incurring any gift tax consequences.

The Crummey Trust’s History

Clifford Crummey, the first successful taxpayer to apply this strategy, inspired the name of the Crummey trust. The Internal Revenue Service (IRS) attempted to deny him and his family the annual gift tax exception when he created a trust in this manner in 1962. The IRS claimed that the trust did not meet the gift tax exclusion’s immediate interest requirement.

The investigation carried on for several years. Finally, in 1968, the courts sided with the Crummeys and decided in their favour.

As a result, the Crummey trust remains an attractive alternative for families seeking to make lifetime gifts to their children while avoiding gift taxes.

How a Crummey Trust Operates

Crummey trusts differ from other forms of trusts in terms of taxation and asset transfer to trust beneficiaries. When you create this form of trust, the beneficiary is given a time frame within which they can withdraw assets. For example, they may be able to do so within the first 30 days of the trust being established and funded.

This withdrawal power grants them a present interest in the trust’s financial gifts. This function helps you to reduce or avoid gift taxes when sending money to underage children or any other beneficiary.

While the beneficiary might potentially remove assets from the trust during this time period, it is doubtful that a minor kid would do so. Assuming that no assets are withdrawn during this time, any financial donations you’ve made will remain in the trust and will be given to the recipient or beneficiaries in accordance with the terms and schedule you’ve established. It is the trustee’s responsibility to guarantee that the provisions of the trust you’ve described are followed.

What are Crummey Powers?

Transfers of property to an irrevocable trust established for a beneficiary are treated by the IRS as gifts for federal gift tax purposes. The annual gift tax exception, on the other hand, is only available for presents of a “present interest.”

Gifts under trust normally do not qualify for the annual gift tax deduction because the beneficiary of the trust acquires a future interest in the property rather than a present interest. However, in the landmark case Crummey vs. Commissioner, the Court determined that providing a beneficiary with a temporary right to withdraw the gift qualified as a present interest and qualifies the gift for the annual gift tax exclusion.

Crummey Powers offer a beneficiary the temporary ability, usually for 30 to 60 days, to take cash immediately after you make a gift to the trust. If the beneficiary does not exercise the right, it expires and the property becomes a permanent part of the trust.

Why Would I Establish a Crummey Trust?

Crummey Trusts are not appropriate for everyone. For starters, most of us are unable to make big annual contributions to beneficiaries.

However, if you have a sizable nest egg and want a vehicle to make annual gifts to beneficiaries in trust, maybe to reduce the size of your estate and hence the amount of estate tax your estate may have to pay upon your death, a Crummey trust may be a perfect instrument for you.

Yes. The gift tax exclusion applies to outright gifts made to a beneficiary. Trusts, on the other hand, are a smart alternative if your beneficiaries are children and you don’t want them to have access to a big sum of money at a young age or adults who want some creditor protection.

Spendthrift provisions in trusts preserve the trust assets. These clauses forbid a beneficiary from selling, giving away, or otherwise transferring his or her stake in the trust assets, and they also restrict a beneficiary’s creditors from gaining access to the beneficiary’s interest in the trust.

A trustee oversees the assets and delivers payouts in accordance with the terms you specify. It is also conceivable to empower beneficiaries to serve as trustees of their own trust when they reach the age of majority. The trust’s assets are protected by the spendthrift restrictions, but assets distributed outright are not.

Can I make a contribution to the trust that exceeds my annual gift tax exclusion?

Yes. Americans enjoy a $15,000 yearly gift tax deduction; therefore, people who make donations in excess of $15,000 do not have to pay any gift tax. This is due to the fact that, in addition to the annual gift tax exclusion, they have a federal estate tax lifetime exclusion. The estate tax lifetime exclusion will increase to $11.7 million per person in 2021 (it is currently $11.58 million per person). Annual gifts in excess of $15,000 can be deducted from your lifetime exclusion.

Crummey Trust: Can They Fail?

Because the IRS views Crummey trusts with suspicion, it is critical that all formalities are followed in order to secure your annual gift tax exclusion:

  • The trustee or the person making the gift shall notify the beneficiaries in writing as soon as you make a contribution to the trust in accordance with the trust agreement. If a beneficiary is a minor or has a disability, the trustee may give the notice to the beneficiary’s parent or guardian.
  • The beneficiary should sign and date the notice as proof of receipt, and the trustee should save the notices with the trust records.
  • The time frame in which the beneficiary can exercise his or her withdrawal rights should not be too short. The beneficiary should be able to withdraw for at least 30 days after receiving notice of the donation.

While a Trustee or Grantor can highlight the advantages of retaining assets in a trust, such as creditor protection, there should be no written or implicit agreement between the grantor and trustee or the beneficiaries not to exercise the withdrawal authority.

An estate planning attorney can assist you to assess whether a Crummey Trust can help you achieve your goals and advise you on how to operate the trust so that your annual gift tax exclusion is preserved.

Benefits of Crummey Trust in Estate Planning

The primary benefit of adding a Crummey trust in your estate plan is the advantageous tax treatment of financial gifts. Assuming your recipient does not remove assets from the trust during the withdrawal period, any money added to the trust on their behalf qualifies for the annual gift tax deduction.

The yearly gift tax exclusion maximum is $15,000 per person, per taxpayer, beginning in 2020. So, if you’re a married couple filing a joint return, you could theoretically gift $30,000 per child, each year, without incurring the gift tax. When you prepare your taxes, you may still need to file a gift tax return.

The key to making this rule work for you is to specify a reasonable withdrawal time in your Crummey trust during which your beneficiary can exercise his entitlement to take money from the trust. Withdrawals are unlikely to be an issue for minor children if you’ve established a trust for them.

It’s not commonplace for adult beneficiaries to state that if assets are removed from the trust during this withdrawal period, no additional financial contributions would be provided. This can serve as a deterrent to beneficiaries from withdrawing trust assets too soon.

Crummey trusts can be used to transfer wealth as well as for college planning. You could, for example, request that the trust funds be used to pay for college. You might even stipulate that your child will not be able to access the funds until they have completed college or reached a specific age.

Crummey trusts, in a nutshell, can provide you control over trust assets and when they are delivered to beneficiaries, while also providing tax benefits. Both can be useful if you want to plan for your child’s financial future in addition to custodial accounts or 529 college savings accounts.

Is There a Drawback to Crummey Trust?

There are a few potential negatives to consider if you think a Crummey trust could be a valuable addition to your estate strategy.

The first is the cost of establishing and maintaining a Crummey trust. You’ll usually have to pay an attorney to help you set up the trust, and the trustee can also charge a fee. The only exception is if you are functioning as the trustee yourself.

However, this means that the trust can be included in your taxable estate. As a result, it may be preferable to select a neutral third party to act as trustee in order to reduce your own tax responsibility.

Finally, there’s always the chance that your trust beneficiary will withdraw funds from the trust during the withdrawal period. This would nullify any gift tax exclusion benefits you could have received from placing the money in the trust.

Because these trusts can be more complicated than other types of trusts, it may be beneficial to discuss the details with an estate planning attorney. An estate planning attorney can advise you on whether a Crummey trust could benefit you, and if so, what parameters to include in the trust to maximize the value of any assets you’re gifting to beneficiaries.

Conclusion

Crummey trusts are simply one method for managing wealth transfer to future generations. These trusts can provide some tax benefits, and if you create one on behalf of underage children, they provide you more control over when assets can be accessed than a custodial account. Examining your overall estate and tax planning picture will help you determine where you should use a Crummey trust to accomplish your financial goals. As with any other sort of trust, the costs of establishing and sustaining the trust over time must be considered.

Crummey Trust FAQs

What is a Crummey provision in a trust?

The Crummey power, named after a taxpayer in a landmark tax decision in 1968, is a common trust feature that permits a gift that would otherwise be a future interest gift to be considered as a present interest gift and therefore qualify for the annual gift tax deduction.

What is the purpose of a Crummey notice?

The term “Crummey Notice” refers to a letter advising a beneficiary that assets have been added to trust and informing the beneficiary of his or her right to remove such assets, if applicable.

Are Crummey notices required?

Crummey notices are an important aspect of trust administration since they are required for the gift to be classified as a “finished gift” for tax reasons. A gift will not qualify for the annual gift tax exclusion until it is declared “finished.”

Can Crummey notices be emailed?

The Crummey notices may be sent to each of the current beneficiaries by electronic mail, i.e., email. If your trustee chooses to do so, he or she should request the beneficiary acknowledge receipt in a follow-up e-mail. E-mails can also be electronically filed and/or printed and saved for future reference.

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