The benefits of a Crummey trust are anything but “crummy.” This type of estate planning tool, named after the taxpayer in the first case authorizing its use, allows you to claim the annual gift tax exclusion for periodic transfers to an irrevocable trust.
Background: Under the annual gift tax exclusion, in 2016 you can transfer up to $14,000 a year to as many recipients as you like without paying any gift tax $28,000 for joint gifts made by a married couple (unchanged from 2015). To qualify for the annual gift tax exclusion, however, the gift must be a gift of “present interest.”
With a Crummey trust, you transfer property to the trust, designate the beneficiaries and appoint a trustee. Whenever you add funds to the trust, the beneficiaries are granted the right to withdraw the contribution for a brief period of time (for example, 30 or 60 days). If the beneficiaries do not withdraw the funds during this specified time period, the gift is locked inside the trust until it terminates. According to the Ninth Circuit Court, these transfers constitute gifts of a present interest (Crummey, 397 F2d 82, 1968).
Without the benefit of a Crummey trust, the same gifts would be considered “future interests” (because the recipient does not have a present right to full enjoyment of the gift) and the annual exclusion would not be available.
|Sending Crummey Notices
Courts have frequently ruled that in order to receive the benefits of Crummey trusts, you must comply with the administrative burdens, including sending notices to beneficiaries every time a gift is made.
A Crummey trust is a good way for parents, grandparents and other relatives to transfer assets to minors or adults and still retain some control.
Note that the beneficiaries of a Crummey trust do not have the automatic right to withdraw property at age 18 or 21. This enables you to maintain greater control over the assets transferred to the trust. In contrast, if you give your child assets through a custodial account set up under the Uniform Transfer to Minors Act (theUniform Gifts to Minors Act in some states), your child will become entitled to the money in the account upon reaching the age of majority.
When setting up a Crummey Trust, it is recommended that you choose an independent third party, perhaps an attorney or accountant, to act as trustee. Otherwise, the trust assets may be included in your taxable estate.