What can a Crummey trust do for you?

ANSWER:  The term “Crummey trust” comes from the United States tax court decision Crummey v. Commissioner in which Clifford Crummey became known for the successful use of this technique to avoid paying gift taxes. The Crummey trust is especially desirable for grandparents or parents wanting to make monetary gifts to grandchildren and other donors making gifts to minors because it allows them to place the gifted funds in trust for the recipients rather than giving them the money outright, and without paying a gift tax as long as the gift falls under the annual exclusion limit. Since the gifts are made during the donor’s lifetime, they also are not subject to estate taxes, as they would be if the gifts were made on the donor’s death, such as in a Will.

The present annual tax exclusion is $14,000 per recipient, per donor. For example, a married couple with two married children and four grandchildren (two donors, each having eight beneficiaries) could give away $224,000 each year by using this exclusion to make gifts to Crummey trusts for their two adult children, their spouses, and the four grandchildren.  If a couple is making the gifts at year end, they could make a gift in December 2015 and another gift in January 2016 to double the amounts of the gifts. Couples with many children and grandchildren, nieces, nephews, etc. to whom they want to make gifts can make very substantial non-taxable gifts using this technique.

As is typical with many provisions in the Internal Revenue Code, this comes with a catch. In theory, each recipient must have a “present interest” in the trust, meaning they have the right to withdraw the funds from the trust. Most practitioners take the position that the funds must be available for withdrawal for a period of 30 to 60 days after the gift has been made, after which the funds become subject to the terms of the trust, which usually specify at what age the recipient is allowed access to the funds. However, most recipients do not withdraw the funds from the trust during the initial 30 to 60-day period because they understand that the donor’s intention was for the money to remain in trust until they have attained a certain age.

As with many estate planning techniques, one size does not fit all. This technique is especially beneficial for people with large estates and a large group of potential beneficiaries. Unfortunately, it is not particularly helpful for people with more modest estates.