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What is a Crummey Trust?

Estate Planners | Monday, August 8th, 2011

Don’t let its name fool you; the Crummey trust is a very viable option in estate planning. The Crummey trust can be used to legally avoid the payment of estate or gift tax when transferring money or other assets to someone else. And as a bonus, the grantor (person establishing the Crummey trust) can still specify to a certain degree how the transferred money and assets are used. To best understand the Crummey trust works, let’s look at a real world example.

A mother and father naturally want to pass their wealth on to their children. Understandably, mom and dad want to do this is a way that will help to avoid sharing their hard-earned money with Uncle Sam. The way that tax code is set up, that goal is next to impossible. In reality, when you leave your children an inheritance, your estate is subjected to paying estate tax on whatever you bequeath to them. Further, if you wish to simply give them something that has value to it while you are still living, the transfer of assets will be subjected to a gift tax, which is taxed identically to the estate tax rate. Nonetheless, you can get around paying estate or gift tax by establishing an irrevocable living trust. But there is a catch. To take advantage of the annual gift tax exclusion of $12K per year, you must actually give something to someone. The beneficiary of the gift that you give has to have a present interest, not a future interest, in the gift. In other words, there has to be the option for the beneficiary to use the gift now, as opposed to later. This will obviously not work if your beneficiary is your twelve year old daughter. It also will not be of benefit if you wish to use the purported gift for a particular purpose. Enter the Crummey trust. When the irrevocable living trust qualifies as a Crummey trust, you get the best of both worlds.

With a Crummey trust, your “gift” will qualify for the annual gift tax exclusion and not be included in your estate for the purposes of estate taxes. You can still place substantial restrictions on the manner in which the money is spent. For example, you can put the gift you want to leave in a trust with the specification that your child will not receive the trust until he attains a certain age. Or you might place the gift into an irrevocable life insurance trust; in fact, the most common reason for establishing a Crummey trust is for this purpose.

But then you still have to give your beneficiary present interest in the gift, in the “here and now”. Luckily, for tax purposes, this stipulation can be overcome as you give proper notification to the beneficiary of their right to withdraw your gift from the trust for at least thirty days after the gift is made. This right to withdraw meets the present interest stipulation. After the beneficiary’s right to withdraw lapses, the gift will remain in the trust and will be distributed or used per the trust’s terms, and is no longer a part of your estate. This means it is not subject to gift or estate tax. Thus, the Crummey trust is a fantastic estate planning tool.

Talk to your estate planner about the Crummey trust to determine if it is good tool for your particular situation.

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