The Benefits of a Crummey Trust

Gift giving is on everyone’s minds now that we are in the midst of the holiday season.  Although generosity can be personally rewarding, it can cost you more financially than you might expect.  The IRS will be sure to take its share of your gifts through the federal gift tax, which is currently 40%.  The annual gift tax exclusion can help, but only so much. If you are considering using a trust in order to bestow a sizeable gift, make sure you understand the benefits of the Crummey Trust.

The limitations of the gift tax exclusion

If you are accustomed to giving gifts to loved ones each year, you are likely aware of the federal gift tax exclusion, which is currently $14,000 per recipient.  This means that any gift amount that does not exceed $14,000, for each person each year, can be transferred tax free.  However, there is a catch.  This exclusion only applies to gifts of present value.  In other words, the rights to the asset must be given immediately.  This means, the gift tax exclusion would not apply to gifts made in the form of a trust.

Why are trust gifts taxed?

Gifts made to trusts are not excluded from taxes because they are not “present interest gifts.”  The recipient does not receive an unrestricted right to “immediate possession, use and enjoyment” of a gift placed in trust. For instance, an irrevocable trust, to which your son does not have access until he reaches age eighteen, is a gift of a future interest. The annual gift tax exclusion would not apply.  There is a way to transfer that gift tax free, if you know the proper provisions to include in your trust agreement.

Using a Crummey Power provision

It is possible to include a provision in your irrevocable trust that allows the trust beneficiaries to withdraw gifts from the trust, for a certain period of time.  This provision is referred to as a Crummey Power.  When this option exists, the beneficiaries are allowed to receive money immediately, which makes the gift one of present interest.  With this provision, the trust gifts qualify for the federal annual gift tax exclusion.  Otherwise, the gifts you make to the trust are subject to the 40% gift tax.

Where did the term come from?

This unique provision is called a “Crummey” power because it was first recognized as an effective tool in the 9^th Circuit opinion in Crummey v. Commissioner, decided in 1968.  The court determined that this method was preferred over other methods because it does not restrict any of the trust provisions involving the disposition of the assets after the right of withdrawal period has ended.

When funds are transferred to an irrevocable trust that includes a Crummey Power provision, the trustee will provide notice to each beneficiary of his or her right to withdraw funds.  The withdrawal period is usually 30 days.  The gifts will qualify for the gift tax exclusion even if the beneficiaries never withdraw any funds.  The mere fact that the opportunity to do so is present, allows the trust gifts to qualify.

If you have questions regarding a Crummey Powers, or any other estate planning needs, please contact Wilcox Attorneys, PA online or by calling us at (479) 443-0062.