What is a Crummey Trust?

Originally published by Rania Combs.

When I tell some of my clients they should consider Crummey Trusts for their beneficiaries, there is typically an awkward pause.

“Why would I want to create a crummy trust?” they ask.

Crummey trusts are not crummy. They are actually quite beneficial because they allow you to make gifts in trust that qualify for the annual gift tax exclusion.

What is the Annual Gift Tax Exclusion?

Currently, Americans can give up to $15,000 annually to any individual recipient without having to pay gift tax. The amount of the annual gift tax exclusion changes periodically.  There is not a limit on the number of people to whom you can make a $15,000 annual gift. For example, if you have 5 children and 10 grandchildren, you can give each one of them a $15,000 gift annually if you so choose without any gift tax implications.

What are Crummey Powers?

Transfers of property to an irrevocable trust you create for a beneficiary are treated as gifts for federal gift tax purposes. However, the annual gift tax exclusion is only available for gifts of a “present interest.”

Gifts in trust generally do not qualify for the annual gift tax exclusion because the beneficiary of the trust receives a future interest rather than a present interest in the the property. However, the Court in the landmark case, Crummey vs. Commissioner, ruled that giving a beneficiary a temporary right to withdraw the gift qualifies as a present interest and allows for the gift to qualify for the annual gift tax exclusion.

Crummey Powers give a beneficiary the temporary right, usually 30 to 60 days, to withdraw the funds immediately after they are contributed to the trust. If the beneficiary does not exercise that right, the right lapses and the property becomes a permanent part of the trust.

Why Would I Create a Crummey Trust?

Crummey Trusts are not for everyone. For one thing, most of us are not able to make large annual gifts to beneficiaries.

But of you are fortunate to have amassed a large nest egg and want a vehicle to make annual gifts to beneficiaries in trust, perhaps as a means of reducing the size of your estate and thereby minimizing the amount of estate tax your estate may have to pay upon your death, a Crummey trust may be an ideal tool for you.

Yes. Outright gifts you make to a beneficiary do qualify for the gift tax exclusion. However, if your beneficiaries are minors and you don’t want them to access a large sum of money at a young age, or adults for whom you want to provide some creditor protection, trusts are a good option.

Trusts include spendthrift provisions that protect the trust assets.  These provisions prohibit a beneficiary from selling, giving away, or otherwise transferring his or her interest in the trust assets, and prevents a beneficiary’s creditors from reaching the beneficiary’s interest in the trust.

The assets are managed by a trustee, who controls the assets and makes distributions according to terms that you establish. It is even possible to allow beneficiaries to serve as trustee of their own trust at an age when you believe they would have the capacity to do so. Assets held by the trust are protected by the spendthrift provisions, whereas assets distributed outright are not.

Can I Contribute More than My Annual Gift Tax Exclusion to the Trust?

Yes. Americans have a $15,000 annual gift tax exclusion; however, those making gifts in excess of $15,000 a year will not necessarily owe any gift tax. That’s because in addition to the annual gift tax exclusion, they also have a federal estate tax lifetime exclusion. In 2021, the estate tax lifetime exclusion will be $11.7 million per person (it’s currently $11.58 million per person). Annual gifts that exceed $15,000 can be deducted from your lifetime exclusion.

Can Crummey Trusts Fail?

The IRS views Crummey trusts with suspicion, so it is important to observe all formalities to preserve your annual gift tax exclusion:

• The trustee or person making the gift should notify the beneficiaries in writing immediately after a contribution to the trust is made in the manner outlined by the trust agreement.  If a beneficiary is a minor or a disabled person, the notice can be delivered to the beneficiary’s parent or guardian.
• The beneficiary should sign and date the notice, confirming receipt, and the trustee should maintain notices with the trust records.
• The period during which the beneficiary can exercise withdrawal rights should not be too short. The beneficiary should have the right to withdraw for at least 30 days from when they receive notice of the contribution.
• While a Trustee or Grantor can explain the benefits of retaining assets in trust, such as creditor protection, there should not be an express or implied agreement between the grantor and trustee or the beneficiaries not to exercise the withdrawal power.

An estate planning lawyer can help you determine whether a Crummey Trust can help you achieve your goals and advise you on how to administer the trust in a way that helps preserve your annual gift tax exclusion.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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