A Crummey estate planning tool for
transferring assets and limiting estate taxes
Written on May 29, 2015 by bdickson in Large Estates, News, Taxes
One valuable tool for reducing the value of your estate is to gift assets out. This move can
potentially allow your estate to avoid estate taxes and income tax. Individuals can currently gift
$14,000 a year to recipients ($28,000 a year to a recipient if the gift is from a married couple)
without affecting their lifetime exemption or generating a gift tax. However, a gift meets the
requirements only if the transfer allows the immediate use of the asset. This might not be a route
someone wants to go if his or her child or grandchild is still too immature to properly handle the
asset. One option for handling this is the Crummey Trust. A Crummey Trusts is an estate
planning tool that takes advantage of the gift tax exclusion for transferring money or assets to
another person while placing limitations on when the gift can be used by the recipient. To meet
IRS requirements it gives the beneficiary the right to withdraw the contribution for a limited time
(such as 30 days). The expectation of the donor is that the power to withdraw won’t be exercised
but there can’t be any express agreement to this effect. The crux of the Crummey Trust is that the
gift recipient must be given unrestricted rights to the immediate use, possession or enjoyment of
the property in the Trust in order to meet IRS requirements. Once that period has expired, the
assets are untouchable until the requirements of the trust are fulfilled such as the donee reaching
a certain age. The primary benefit of a Crummey Trust are that:
1. The donee has no right to the property at age 18 or 21 but that the trust continues for as
long as specified in the trust agreement
2. The trust can be established for multiple beneficiaries including beneficiaries over the age
of 21, few beneficiaries will withdraw any contribution as doing so threatens the
possibility of future contributions
3. The maximum amount that can be withdrawn is the annual contribution rather than the
entire trust
4. Once the donee has waived his or her rights to withdraw a contribution, control over the
contribution rests with the trustee
Crummey Trusts are named after D. Clifford Crummey, the first taxpayer to use the trust
successfully. Reverend Crummey paid into a trust that bought a life insurance policy on his life
so that at his death the trust would receive the insurance proceeds and pay them out to his
beneficiaries. To meet the Crummey Trust requirements, the premiums have to be below the
annual gift tax threshold (now of $14,000 per individual) and the donees must receive
notification, usually in the form of a Crummey letter of the specific window of time, that they
might elect to withdraw the gifted funds.
Four factors determine whether a Crummey trust gifts meet the IRS requirements. They are:
1. The trust is required to give the beneficiary reasonable notice in which to exercise the
withdrawal right;
2. The beneficiary is given adequate time following notice in which to exercise the
withdrawal right;
3. Upon exercising the withdrawal right, the beneficiary will have the immediate and
unrestricted right to an amount equal to the amount contributed to the trust; and
4. There is no understanding or agreement, expressed or implied, that the withdrawal will
not be exercised.
Although a recent case involving letters of notification not getting set out was ruled in favor of
the donor, get reliable professional help with Crummey trusts, and make sure the duty to send out
the annual letters is very clear so it doesn’t fall between the cracks.