Why Having a "Crummey Trust" Is a Good Thing

Crummey Trust

3 min read

Estate planning is important for many reasons, no matter how large or modest your estate is. It can prevent unintended beneficiaries, protect your children, and eliminate family chaos. For wealthier individuals, it can also ensure that you transfer your wealth from one generation to the next while paying as little in taxes as possible.

A Crummey trust is an excellent tool used in estate planning, and it’s anything but crummy. Named after a famous tax case involving Reverend Crummey and the IRS in the 1960s, this type of irrevocable trust is a creative way to provide financially for both your children and grandchildren while paying no gift taxes and reducing your taxable estate.

To make a Crummey trust work for you, it must be administered properly. Here’s a breakdown of how exactly it works.

What You Need to Know About Crummey Trusts

A Crummey trust is a vehicle to transfer assets from one generation to the next tax-free. This type of trust will also limit your children and grandchildren’s decision-making power over the transferred assets. If you’re hesitant to give outright gifts to your loved ones for fear they will squander the gifts, then a Crummey trust might be the right tool for you.

The provisions of a Crummey trust are specifically designed to allow the money placed in the trust to qualify for the annual gift tax exclusion. The gift’s value cannot exceed the permitted annual exclusion amount, which is $15,000 for tax year 2019.

Be careful not to overlook the proper administrative details, as the IRS carefully scrutinizes Crummey trusts. It is only considered a tax-free gift if the beneficiary has the right to take the money placed in the trust in the short term.

Therefore, you must give the recipient the right to make one withdrawal from the trust each year during a specified window, such as 30 days. You also must inform them of their right to withdraw funds from the trust by sending out a “Crummey letter” every year. The idea is to make the right available in such a way that it is not exercised.

The Tax Advantage of a Crummey Trust

Because a Crummey trust is an irrevocable trust, once you have moved your funds into the trust, those funds are no longer considered part of your estate. This means that someday when you die, the money you placed in the trust will not be taxed with the rest of your wealth.

Good Things Come from Crummey Trusts

Crummey Trusts are scrutinized carefully by the IRS, and they have been the targets of much litigation. It is essential to comprehend the workings of a Crummey Trust fully and to craft the trust language clearly. We recommend working with a professional each year, as it’s always a smart idea to have another set of eyes on your Crummey letters.

Learn More about Estate Planning

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August 6, 2019