There are many different types of trusts that people can use as part of their estate plan, some more well-known than others. One such trust is known as the “Crummey” trust, named for the case of Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). A Crummey trust is an irrevocable trust that enables annual gifts to be made to children or grandchildren or others (the trust beneficiaries) without giving the beneficiaries control of the funds.
Tax Advantages
The advantage of a Crummey trust is the ability of the donor(s) to utilize their annual gift tax exclusion amount, $14,000 this year, to transfer property from their taxable estate to their heirs in trust free of gift or estate tax. (The $14,000 applies to each recipient.)
Present Gift Taxes
The $14,000 annual gift tax exclusion amount applies to “present” gifts, and not “future” gifts, and gifts in trusts are typically future gifts. A Crummey trust, however, includes a limited power of withdrawal (a “Crummey” withdrawal power) enabling a trust beneficiary the right to withdraw funds deposited in the trust for a limited period of time, typically 30 or 60 days. This withdrawal power converts a future gift into a present gift, and makes the Crummey trust a powerful tool for transferring money out of the donor’s estate tax fee.
Potential Downside
In order for the donor to claim the annual gift tax exclusion, each beneficiary must have a Crummey withdrawal power, and each beneficiary may use that power (within the limited time period specified in the trust) thereby potentially undermining the donor’s long-term plan of transferring wealth out of their estate in trust.
