From our “Ask a Question” Mailbag: Crummey Powers and Crummey Trusts

“What is a Crummey Trust and are there any powers associated with it?”

Crummey Powers and Crummey Trusts

Summary:

In 2014, a trust utilizing Crummey powers allows an individual to contribute $14,000 a year ($28,000 for married couples) into a trust without diminishing the lifetime gift tax exemption. Instead, the gift is exempt from the gift tax under the Annual Gift Tax Exclusion. These gifts can help avoid the 40% Federal Gift Tax, preserving wealth for the family.

Typical Uses:

Crummey powers are typically used in Irrevocable Life Insurance Trusts and in Gift Trusts.Crummey powers are a valuable tool whenever someone wishes to make gifts to an Irrevocable Trust, but not use up the Federal Gift Tax Exemption.

How it works:

The Federal Gift Tax does not apply to Annual Exclusion Gifts. The Annual Exclusion states that any person can annually make a gift to another person free of gift tax. In 2014 this gift can be up to $14,000, and this amount is adjusted for inflation each year. In short, this $14,000.00 is considered to small to keep track of for the Federal Gift Tax. But, to qualify, the gift needs to be given directly to the person creating a “present interest”.

The statute is designed to exclude any gifts being made to a trust, as those are “future” interests to the beneficiary. Crummey powers are the result of clever lawyering. They create a “present” interest even though the gift is made to an irrevocable trust. The IRS is not pleased with the result, but the Supreme Court ruled against the IRS’ protests.

Creating a Present Interest:

In order to qualify as an Annual Exclusion, the gift recipient must have a present interest in the gift. When a trust uses Crummey powers, those Crummey Powers allow the beneficiary to withdrawal the gift with no strings attached for a period of time; similar to any other gift.The IRS accepts a period of 30 days after receiving notice of the gift to establish authentic Crummey Powers. To satisfy the rules created by the Supreme Court, the trust must require the trustee to notify the beneficiaries of their right to claim the gift.

The opportunity to withdrawal the gift outside of the trust during the 30 days is sufficient to create a present interest in the gift. This is true whether or not the withdrawal rights are exercised. Therefore, after 30 days if the withdrawal rights are not exercised, the gift lapses into the trust and the trustee may use these gifts in accordance with the terms of the trust document.

More Information

Typically, once the gift lapses into the trust, the withdrawal rights terminate. The trustee is then free to use the funds to pay for life insurance or to accumulate the funds to benefit the beneficiary in the future.

Typically, the expectation of future annual gifts under the same mechanism, or other expectations, motivates the beneficiary of the gift not exercise the right of withdrawal and allow the funds to lapse into the trust.

As a team, a married couple may transfer $28,000 per year ($14,000 each parent), per child, into trust tax free without counting against their 5 million dollar lifetime estate tax exemption. If this is done annually over a long period of time, the Crummey trust can remove a substantial amount of money from the parent’s taxable estate and free of the parents’ creditors.

Example without Crummey Trust (10 years)

Family Assets: $11,120,000
Children: 4

The parents’ both die able to shelter $10,000,000 from the Federal Estate Tax, but pay a $448,000.00 Federal Estate Tax (40% tax on $1,120,000).

Example with Crummey Trust (10 years)

Family Assets: $11,120,000
Children: 4

Year 1-10 transfers into Crummey trust: (4 x 28,000 x 10 years) = 1,120,000

Result: $ 10,000,000 protected by the Federal Estate Tax and $1,120,000 which passes tax free in the Crummey trust. Tax savings: $448,000.00.

More Planning Questions?

Crummey Powers and Crummey Trusts are only a piece of the Estate Planning process. By all means, if you want to learn more, please read my more detailed article, Estate Planning Everything You Need to Know.

In Conclusion: Crummey Powers and Crummey Trusts

I hope that this article was helpful in explaining Crummey Powers and Crummey Trusts. Further, I included links to even more detailed information on my website so you can learn more. Therefore, please contact me and let me know how I did. Certainly, your comments and questions are welcome!

Let our Estate Planning lawyers help walk you through what can be a confusing process. To begin with, call to speak to one of our experienced estate planning lawyers.  By all means, our lawyers are ready to answer your questions. In fact, feel free to contact our office for a free consultation. Ultimately our goal is to make the process as painless as possible!

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Tags: Estate Planning, Estate Planning Attorney, Estate Planning Lawyer, Life Insurance