What is a Crummey trust?
UPDATED: December 9, 2015
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Crummey is the name of a taxpayer who succeeded getting an annual exclusion by establishing a trust containing withdrawal rights for the benefit of minor children. A Crummey trust is a special form of trust that contains a provision allowing one or more beneficiaries the right to withdraw the lesser of either the annual exclusion amount or the value of the gift property transferred into the trust. Crummey trusts specify the time each year when the funds can be withdrawn to ensure that the beneficiary does not incur gift taxes. Crummey trusts are most commonly created for minors and irrevocable life insurance trusts.
Tax Advantage of a Crummey Trust
It can be disheartening to a successful couple to think of their wealth going to taxes when they die. In fact, at one point in American history, 75 percent of large estates would be taken as estate taxes. The Crummey trust is a creative way around estate taxes and a means of removing funds from your estate without costing your family high taxes.
Every year the IRS allows a certain amount of one’s wealth to be freely gifted to other people. These people can be family or friends. For 2015-2016, the total maximum gifting amount is $14,000 per person that can be given away without any tax consequences. This amount may seem small when you are trying to eliminate a $3 Million estate, but there are other tricks that can be combined, and this is where a Crummey trust comes into play.
A Crummy trust is an irrevocable trust. This means that the funds are permanently moved into the trust. Once there, the funds are considered removed from the couple’s estate. Even better, you can start giving the funds away to your family right away, by allowing them to withdraw the annual gift exclusion amount each year at the same time.
Crummey Trust and Present Gift Taxes
Another reason for making a Crummey trust is to avoid the IRS future gift tax requirement. Crummey trusts are considered a section 2503 (c) exception. This means that because the funds can freely be withdrawn as soon as the trust is funded, then the gift is considered a present gift not a future gift. The reason for this difference is that present gifts fall under the gift exclusion tax, future gifts may be included in your estate. So, by establishing a present gift, you entirely eliminate the funds from your estate.
Requirements for a Crummey Trust
The requirements for a Crummey trust to be valid are simple. First, the trust must be established for the care of someone under the age of 18. This means that Crummey trusts can only be created for the care of children, grandchildren, great-grandchildren, or any other child. Second, the child must be given notice annually that they have the right to withdraw funds from the trust. Third, they must withdraw an amount annually from the Crummey trust. Many times, children will be instructed to simply withdraw $1 each year during that set time to ensure the trust remains lawful
If you have further questions regarding what a Crummey trust is, or are interested in creating a Crummey trust, it's important that you consult with an estate planning attorney to draft a lawful and beneficial trust.