Crummey trusts can be a useful estate planning tool for high-net-worth individuals who are hoping to minimize gift and estate taxes. The Crummey power confers the right to withdraw assets from the trust to its beneficiaries, though this power isn’t actually intended to be used. Instead, it’s designed to make ineligible gifts eligible for the annual gift tax exclusion. That’s explained to beneficiaries in a Crummey letter or Crummey notice. If you receive one of these letters, it’s important to understand what it means to you.
A financial advisor could help you create an estate plan to protect your family’s future.
What Is a Crummey Trust?
A Crummey trust is an irrevocable trust that’s designed to hold assets that are meant to be distributed to one or more beneficiaries at a future date. Crummey trusts can be valuable to those with larger estates from a tax perspective. That’s because they can be used to make assets in the trust eligible for the annual gift tax exclusion.
Ordinarily, gifts made to someone else through a trust convey a future interest in those assets. For example, you might leave money to your children in a trust under the stipulation that they can’t withdraw those assets until their 25th birthday. So they can’t actually access or use those assets now.
In order for gifts to be eligible for the annual gift tax exclusion, they must represent a present interest. That’s where the Crummey trust and the Crummey power come in. When you create a Crummey trust, you can include a provision that allows the beneficiaries to withdraw assets within a specified period. For instance, they might be able to withdraw assets in the 30-day period following the creation of the trust.
That is the Crummey power but as mentioned, it’s not meant to be used. Instead, what it does is create a present interest in those assets for the beneficiaries. That allows the assets to become eligible for the annual gift tax exclusion. For 2023, the gift tax exclusion limit is $17,000 per gift, per person. The limit doubles to $34,000 for married couples who file a joint return and split gifts.
Separate from that is the lifetime gift and estate tax exemption. For 2023, the limit is $12.92 million. For married couples, the limit doubles to $25.84 million. So unless you have considerable wealth, a Crummey trust may not be something you need to complete your estate plan. But if you do have a larger estate, you could reap some significant tax benefits by using this type of trust to distribute assets.
What Is a Crummey Letter?
A Crummey letter or Crummey notice is a written document explaining the terms of the Crummey power that’s being conferred to the beneficiaries. The IRS requires that a Crummey notice be sent out to all beneficiaries of the trust and there are certain rules that must be followed:
- The notice must be sent to the beneficiaries when gifts are made to the trust
- The Crummey letter must specify the exact amount of the gift
- Notices must tell the beneficiaries that they have a right to make withdrawals of gifts to the trust and that the right to do so takes effect immediately
- The notice must specify how long they have to exercise the option to make a withdrawal
- Crummey letters must also let beneficiaries know that if they don’t exercise this right, all assets will remain in the trust
The trustee is responsible for drafting the Crummey notice and making sure a copy is sent to each of the trust beneficiaries. Without this notice, a gift is not considered to be “completed” under IRS rules. Unless the gift is completed, then it doesn’t qualify for the annual gift tax exclusion.
Now, here’s what a Crummey letter cannot do. It cannot tell the beneficiary in any way, either directly or implicitly, that they can’t make a withdrawal from the trust if they wish to do so within the allowed time frame. If the notice makes any suggestion that beneficiaries can’t exercise their Crummey power, then the gift tax exclusion doesn’t apply.
What to Do If You Receive a Crummey Letter
If you’re the beneficiary of a trust and you receive a Crummey notice, there’s technically nothing you need to do at all. It’s a good idea to keep a copy of the letter so you have it for your records, but otherwise, you don’t need to take any action.
That assumes, of course, that you don’t want to withdraw any of the assets in the trust. But what if you want to make a withdrawal?
In that case, you’d need to reach out to the trustee and notify them of your intentions. You’d need to tell them how much you want to withdraw and it’s the trustee’s job to ensure that the money gets to you.
Note that you might receive multiple Crummey notices if new gifts are being made to the trust. The trustee has to send one out each time assets are added. But again, you don’t have to do anything with these letters if you don’t plan to make a withdrawal from the trust.
If you’re aware that a gift was made to the trust and you don’t receive a Crummey letter, you may want to talk to an estate planning attorney or your financial advisor about whether that’s a violation of your rights. Even if you don’t plan to withdraw money, the trustee still has an obligation to let you know that you have the power to do so.
Crummey trusts can help wealthier individuals to minimize gift taxes when passing on assets to their heirs. The Crummey letter itself is a simple document but it’s importance can’t be underestimated, as the ability to qualify for gift tax exclusions hinges on its wording and delivery.
Estate Planning Tips
- A financial advisor can help you figure out what to do when you get a Crummey letter or if you’re interested in adding a Crummey trust to your estate plan. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Crummey trusts are just one type of trust you can create to manage and pass on wealth. If you’d like more flexibility, then you might consider a revocable living trust instead. A revocable living trust allows you to transfer assets to the management of a trustee but you can change the terms of the trust or terminate it at any time while you’re still living. Revocable trusts can be used alongside a last will and testament when creating a comprehensive estate plan.
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