A Crummey Trust is a specialized form of trust that allows for a trusted inheritable gift to be exempt of state and or federal taxes. A Crummey trust is named after the Crummey family that tried the case in court when their attempt at tax exempt status was denied. In the case of Crummey v. Commissioner they demonstrated that it was legal for inheritable funds to be transferred as a gift into a trust and still receive the tax exempt status. In particular Reverend Crummey of the “Crummey trust” bought a life insurance policy with a trust and arranged for all benefits of the life insurance policy to be paid out to the beneficiaries by the trust.
When is a Crummey Trust Beneficial?
A Crummey trust is often beneficial in situations where the person establishing the trust desires to make lifetime gifts to beneficiaries to ensure that the money remains tax exempt. A Crummey trust is beneficial in these types of situations as it allows for the gift to remain tax exempt while controlling how the beneficiary will receive the gift.
“A Crummey Trust does not give the child any rights to the income. It does, however, give the child the right to withdraw the amount of each gift for up to 30 days after each gift is made. Since the withdrawal right begins immediately after the gift is made, it is considered a present interest. If the child does not withdraw the gift within the 30 days, the withdrawal right lapses and the money remains in the trust until the child reaches the designated distribution age.”
A Crummey trust is therefore most beneficial in situations in which the gift is intended to be received by minor children. It also places limitations on the window in which the withdrawal can take place and prevents the beneficiary from withdrawing the entirety of the gifted inheritance.
What are the Cons of a Crummey Trust?
The primary drawl back to a Crummey trust is that all gifts are limited to under $13,000.00 per year if they are to be considered tax exempt. This makes the benefits of the Crummey test unavailable to those who wish to provide over the $13,000.00 a year while remaining tax exempt. Another draw back is that it only will limit access to the money until the state specified age of maturity. If you do not intend for the child to receive the benefits at the age of 18 then a formal trust must be utilized instead to prevent access to the inheritable property / money. Lastly, the annual exclusion only applies to gifts in which the beneficiary has a “present interest” in the gift. The “present interest” is qualified by the creator of the trust which may outline interest in which the beneficiary can use the money and the use of the money cannot be withdrawn prior to the occurrence of the interest or in anticipation of future necessity.
If you are interested in formulating a trust or any other legal documents outlining how you wish for your beneficiaries to receive gifts, money, and other items following your death then it is important that you consult with legal counsel to appropriately address such matters. Our experience in estate law will aid you in determining which type of will, trust, or other estate planning needs is right for you.