Crummey Trust and How to Use It!
Crummey trusts allow beneficiaries of a gift to withdraw the money within 30 to 60 days of its deposit in the trust. The beneficiary can withdraw the gift without incurring gift taxes. If they don’t withdraw the gift, it becomes part of the trust for their future benefit. To set up and use Crummey trust, call California trust attorney Hess-Verdon at (949) 706-7300.
It is financially intelligent to create a trust. It helps you preserve your wealth for your heirs and potentially gives you tax advantages. Crummey trusts are unique in that they specifically help to transfer assets to children or others for the sole purpose of avoiding gift taxes.
Gift taxes are federal taxes assessed on gifts given by individuals to others. Gift tax exclusion in Crummey trusts is possible because the beneficiary is given a “present interest” in the trust. This is their timed right to withdrawal.
Understanding how this trust works will help you determine whether you need one and, if so, how often you should use it. For hands-on guidance on whether Crummey trusts are suitable for you, talk to our savvy trust attorneys.
What is Crummey Trust
A Crummey trust allows the creator to pass assets free of both gift and estate taxes to its beneficiaries. It is named after the Crummey v. Commissioner court case of 1968. Grantors generally make gifts to beneficiaries equal to their annual exclusion.
Typically, the beneficiaries have 30 days or less to withdraw the gift, but it cannot exceed 60 days. The gift will remain in the trust if they fail to do so. The gifts will then enjoy all the benefits of irrevocable trusts and will be distributed to the beneficiaries tax-free after the donor dies.
The beneficiary receives a letter informing them of the gift, the Crummey withdrawal notice. By granting the withdrawal right to the guardian of an infant, Crummey withdrawal rights can be given to minors, giving them the ability to make gifts. Beneficiaries’ withdrawal rights are guaranteed every year, so you must issue the Crummey withdrawal notice annually.
The Crummey Power is a limited-time provision (in many irrevocable trusts) for the beneficiary to withdrawal the gifts you make to trusts. Under this provision, gifts made to the trust are eligible to claim an annual exclusion from federal gift taxes.
A person can receive a gift that would not be eligible for a gift-tax deduction but convert it into an eligible gift with Crummey power. The Crummey power is a common feature applied to contributions in an irrevocable trust.
It is important to stipulate in the trust deed the types of gifts and amounts with the overall donation value not exceeding $15,000 ($30,000 for married couples) for each beneficiary per year.
You can include a Crummey power clause as part of the irrevocable trust you transfer funds to. Each beneficiary must then receive sufficient notice from the trustee indicating their right to withdraw funds.
Gifts qualify for the annual exclusion from gift tax regardless of whether beneficiaries exercise their right to withdraw (within 30-60 days). Trust documents specify that the trustee may either invest the money or make life insurance premium payments if no withdrawals happen.
Most people add Crummey powers in their various trusts. However, critical to note is that the trust administration should abide by all the rules for the gifts to qualify for the annual exclusion. Essentially, the grantor must notify beneficiaries promptly that a gift has been made. The beneficiary should have the chance to withdraw the gift.
How a Crummey Trust Works
There are a few differences between Crummey trusts and other trust types regarding taxation and transferring assets to trust beneficiaries. A beneficiary of this type of trust can withdraw assets within a specified time period after the trust is established. By exercising this withdrawal power, they gain a present interest in the funds in the trust. This present interest is what qualifies the gifts in the trust for tax exclusion. This feature helps grantors to give money to minor children or anyone else without triggering gift taxes.
Although the beneficiary is entitled to withdraw assets during the Crummey Timeline, minors are unlikely to make such withdrawals. Therefore, the financial gifts you have put into the trust will remain there during this period and be distributed within the timeframes you specify. The trustee must meticulously follow all trust terms to realize the tax advantages of Crummey Trusts for your beneficiaries.
Advantages of Crummey Trusts
A Crummey trust offers favorable tax treatment to financial gifts as part of your estate plan. When you add money to the trust on behalf of your beneficiary, that money qualifies for the annual gift tax exclusion. If the beneficiary does not withdraw funds from the trust during the withdrawal period, the gifts can be invested and protected as in other types of trusts.
Your Crummey trust must have a legitimate withdrawal date during which the beneficiary may withdraw from the trust if this rule works for you. Withdrawals from the trust shouldn’t present a problem for your children.
Using a Crummey trust can be an excellent way to transfer wealth and plan for your child’s education. If you want the trust money to go towards college or business school, you can specify that. Alternatively, you could specify that the money can’t be accessed until the child finishes college or turns 18.
The trustee manages assets of Crummey trusts, and you set terms that determine when distributions should be made. A Crummey Trust is generally more flexible and advantageous than a 529 college savings account.
Multiple beneficiaries can be included in the trust, including beneficiaries over 21. For 30 days, the beneficiary can withdraw trust assets, but if it is made clear that funds will not be contributed after that, it seems unlikely that they will do so.
The trust allows for distribution to a beneficiary for their education, health, support, and maintenance. These
distributions may be made at any time by a trustee.
There are no penalties for not using funds in Crummey trusts for higher education, unlike other college savings plans. If you wish to use a Crummey trust as part of your estate planning, consult an attorney.
An experienced will and trusts attorney from Hess-Verdon can provide you with more information about Crummey Trusts and any other estate planning options. Don’t hesitate to get in touch with us by phone at (949) 706-7300.
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