Among the various estate planning techniques available, trusts that use a Crummey Power stand out. At Family Legacy™ Estate & Business Planning services from Edward S. Clay, P.A. Law Offices, we can help you decide if this tool is right for you.
What Is a Crummey Trust?
The Crummey Trust was born out of necessity. A transfer of property to an irrevocable trust is a taxable gift – every cent of it – because the beneficiary of the trust would not enjoy the gift until sometime in the future. A gift of a future interest is 100% taxable under the federal gift tax. Mr. Crummey wanted to transfer property to such a trust to benefit his children in such a way that each transfer was exempt from the gift tax. His attorney, in the trust language, included a right for his children to demand payment of the gift to the beneficiary in the same calendar year it was transferred to the trust. This is known as a demand right and the theory was that the right to demand the gift be paid to the beneficiary made the gift a “present” rather than a “future” gift. Being a gift of a present interest would qualify the gift for the annual gift tax exclusion, which in 2024 is $18,000 per recipient. The IRS objected and the case went to court, culminating in the landmark decision in the Ninth Circuit Court of Appeals case, Crummey v. Commissioner in 1968. In the 56 years since, the Crummey Trust has become an important part of the estate planning landscape in the United States. A Crummey Trust is a colloquial term used to described any trust with a demand right by the beneficiary to presently access the gift made to the trust.
How Does a Crummey Trust Work?
Adding Crummey powers to an irrevocable trust provides the opportunity to make gifts to a trust that will provide a future benefit while qualifying for a present exemption. Here’s how it works:
- Initial Transfer: The individual creating the trust (the grantor) transfers assets to the trust, such as cash, stocks, or real estate.
- Crummey Notification: The beneficiaries of the trust (usually children or grandchildren) receive formal notification that they have the right to withdraw their share of the transfer to the trust for a period of time after the transfer to the trust (but not longer than the end of the year), known as the “Crummey withdrawal right.”
- Distribution: If the beneficiary demands the withdrawal, the distribution is made to them. The long term benefits of the trust tend to outweigh the desire to take the gift now, so beneficiaries leave the gift as is, avoiding the risk that future gifts will not be made.
Benefits of a Crummey Power in a Trust
So, why would someone consider setting up a trust with Crummey powers? Here are some of the key benefits:
- Tax Benefits: By transferring assets to a trust, individuals may avoid paying taxes on some or all of those assets. A Crummey withdrawal right helps leverage the annual federal gift tax exclusion and provides for tax-free gift contributions.
- Asset Protection: A Crummey Trust provides an added layer of protection for the assets, as the individuals no longer own them and are, therefore, not subject to their creditors or other liabilities.
- Control: Despite transferring assets to a trust, individuals can still control how those assets are managed and distributed by setting up detailed instructions in the trust and by appointing the managers they want in place.
Common Uses of a Crummey Trust
A Crummey withdrawal right is often used in irrevocable trusts that own life insurance on the creator of the trust, allowing the grantor to transfer funds to the trust that may then be used to pay the insurance premiums by the Trustee. This keeps the insurance out of the grantor’s taxable estate while providing ready cash to beneficiaries upon the grantor’s death without being subject to federal or state estate tax that run between 16% and 40%.
When Should You Consider Creating a Crummey Trust?
The most common use is in the life insurance example noted above, but the Crummey withdrawal right is a technique that can be used any time a gift to an irrevocable trust would be considered a taxable gift of a future right to enjoy the gift. By employing the “Crummey” strategy, some or all of the gift may avoid federal gift tax, depending on the amount of the gift and the number of beneficiaries who would receive a right to withdraw.
A Crummey Trust may be a good option to convert what would be a taxable gift to be non-taxable.
