Establishing a Crummey Trust can help you to accomplish your estate planning objectives for heirs. Such trusts are drafted to enable you to make gifts to heirs during the rest of your lifetime. They also can enable you to retain some control over the monies that are directed to heirs.
Some Basic Limits:
For 2016, the annual amount one individual can gift to another is $14,000. A married couple can combine their limits to increase the annual amount limitation to $28,000. In addition to the annual gift limits, everyone also has what is known as a “lifetime exemption amount” than can be willed or gifted to another. The 2016 lifetime limit is $5,450,000. Once again, married couples can combine their lifetime limits to pass up to $10,900,000 to their heirs tax-free. By removing funds from your taxable estate, it can allow the gifted funds to appreciate in value on a tax-free basis.
Any amounts transferred in excess of the annual limit will reduce the one’s lifetime exemption amount unless gift taxation is elected and included in your income tax return for the year in which the gift was made. (Note: Periodically, the IRS will publish new limits to adjust for price inflation.)
Annual gifts can be made to anyone and to as many individuals as desired. This means that gifts can be made to your children, grandchildren, siblings, relatives, and to others. As long as you do not make gifts to anyone above the annual limit, you will not use up any of your lifetime exemption from estate and gift taxes.
Control Requirements:
You can place some restrictions on how and when the beneficiary of your gift withdraws monies from a Crummey Trust. However, the trust must provide a notice of any gifts to the beneficiaries of the trust and also allow immediate withdrawals of the contributed amounts if requested by the beneficiary. The time period for withdrawal can be limited to a very short period that can be as short as 30 days.
Providing the beneficiaries a "Crummey Powers" right of withdrawal notice is necessary to establishes a “present interest” value for the newly gifted amounts. If done properly, it can be relied upon to ensure that the gift and estate tax limits can apply to the transfers.
Why Crummey Trusts Work
Usually the beneficiaries of Crummey Trusts do not withdrawal newly contributed funds from the trust within the permitted time period for making withdrawals. This is because, in most cases, they know that the real intent of the donor(s) was for the funds to be retained in the trust until a later time.
In violating that intent, the beneficiary will likely understand that any planned future gifts will be discontinued. However, to meet statutory requirements, it is necessary that any such alternative understanding between donor and beneficiary never be documented in any way.
The only ongoing documentation that is desired is to make sure that contribution letters are sent whenever new gifts are made to the trust to remind the beneficiary of the limited time period for accomplishing their immediate withdrawal rights.
Even though the IRS has periodically challenged the use of Crummey Trusts, they continue to be permitted when properly drafted and executed. The last favorably decided court case was Mikel v. Commissioner in U.S. Tax Court on April 2015 involving the tax-free transfer of $1,600,000 to sixty beneficiaries.
When combined with life insurance planning, Crummey Trusts also can help avoid a forced sale to pay estate taxes, and help in distributing equivalent values to beneficiaries for illiquid assets that may include real estate or a family business.
In considering your own situation and any Crummey Trust planning in your will and estate planning, it is important to work with an attorney who is experienced and also specializes in advanced Estate and Trust Planning.
Greg Tinaglia
(last updated 12.26.2015)