Establishing a Crummey trust is something you might consider if you’d like to leave assets to your heirs while avoiding gift taxes. One unique provision of this type of trust is the Crummey power, which allows the trust beneficiaries a set window of time in which they can withdraw assets. The beneficiary isn’t actually intended to use this power, but by including the provision in the trust terms you can exclude financial gifts in the trust from the gift tax.
A financial advisor could help you create an estate plan to protect your family’s future.
How a Crummey Trust Works
A Crummey trust is a type of irrevocable trust that allows the trust grantor to set aside assets for the benefit of one or more beneficiaries. As with other trusts, a trustee is responsible for overseeing the management of those assets according to the terms set by the trust grantor.
What sets a Crummey trust apart is its tax treatment, specifically, with regard to the gift tax. The Crummey power grants trust beneficiaries a present interest in the assets in the trust. That’s important because financial gifts made to others must constitute a transfer of a present interest in order to qualify for the annual gift tax exclusion. Otherwise, the gift is treated as being a future interest and thus, ineligible for the exclusion.
What Is the Crummey Power?
The Crummey power is a specific provision of Crummey trusts that allows beneficiaries the right to make a withdrawal of trust assets, including any income or property that belongs to the trust. Generally, this power can only be exercised within a specific period. For example, the trust document may specify that the beneficiary can only use their Crummey power within the first 30 or 60 days after the trust is established and funded.
By including this provision, beneficiaries are granted a present interest in the trust assets. The caveat is that beneficiaries are not expected to actually exercise this power, meaning they’re not supposed to withdraw any of the assets from the trust within the allotted time frame. If trust beneficiaries are minor children, that likely isn’t a concern.
So why would you want the trust beneficiaries to have Crummey power? Simply, by allowing them the right to make withdrawals from the trust, they gain a present interest in the trust and any gifts become subject to the annual gift tax exclusion. Assuming they don’t withdraw anything from the trust during the specified window, all of the assets in the trust would remain intact until they’re eligible to be distributed to the beneficiaries according to the terms you set.
Crummey Trusts and Gift Tax
For 2022, the lifetime gift and estate tax exemption is $12.06 million. That amount doubles to $24.12 million for married couples who file a joint return. For most people, hitting that limit probably isn’t a concern but it may be for those with a higher net worth. If you have substantial assets you’d like to pass on, minimizing gift tax can help to preserve more of your wealth.
The lifetime gift and estate tax exemption is separate from the annual gift tax exclusion limit. That limit specifies how much you can give away to someone else without having to file a gift tax return. For 2022, the limit is $16,000 per person. So if you have five children, you could gift each of them $16,000 without having to worry about gift tax. Married couples can “split” gifts and double that amount to $32,000 per person.
Applying the Crummey power allows you to spread wealth out and create a financial legacy, without going over the annual gift tax exclusion limit or hitting the threshold on the lifetime estate and gift tax exemption. As long as the beneficiary does not make any withdrawals, you can continue to have control over when they’re able to access and use the assets in the trust.
Trusts, in general, are preferable in situations where you want to be able to have a say in what your beneficiaries do with your assets once you’re gone. You might set up a Crummey trust for your children, for example, if you’d like to specify that they can’t receive their full inheritance until they turn 30 or that they need to complete a college degree as a condition of accessing trust assets.
Who Should Consider a Crummey Trust?
Crummey trusts can be complicated to set up and expensive to maintain, so they’re not necessarily right for everyone. If you’re not in danger of exceeding either the annual gift tax exclusion limit or the lifetime gift and estate tax exemption, for instance, then another type of trust might be better for your situation. Or your estate plan may be sufficient with only a last will and testament.
If you have substantial assets, on the other hand, a Crummey trust could help to shrink the size of your estate in order to minimize gift and estate taxes. There are a few things to keep in mind, however, when setting up this type of trust:
- Gifts to a Crummey trust are irrevocable, meaning that you can’t take assets back out once they’ve been transferred to the trust.
- Any direct or outright gifts you make to a beneficiary outside of the trust would not be subject to the Crummey power.
- Crummey trusts can be subject to scrutiny by the IRS, so it’s important to make sure that if you’re creating one, you’re following the letter of the law.
One important thing to note is that the trust document itself cannot state that the beneficiary should not withdraw assets from the trust during the allowed period. Expressly or implicitly telling the beneficiaries that they’re barred from making withdrawals nullifies the Crummey power and its associated gift tax benefits. Talking to an estate planning attorney or your financial advisor can help you to ensure that a Crummey trust is properly created so that you don’t run afoul of the IRS.
Also, remember that this is an irrevocable trust. If you need more flexibility with managing your assets and estate plan, you may want to consider a revocable trust instead. Revocable trusts can be amended or terminated during your lifetime. Just keep in mind that revocable trusts don’t yield the same tax benefits
The Crummey power exists to provide tax benefits to trust grantors, though it’s not actually meant to be exercised. Whether this type of trust proves useful to you or not can depend on the size of your estate and what kind of gift or estate tax relief you might be seeking. Weighing the cost against the benefits can help you to decide if a Crummey trust makes sense.
Estate Planning Tips
- Consider working with a financial advisor to figure out the advantages and disadvantages of using a Crummey trust in your estate plan. SmartAsset’s free tool matches you with up to three 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.
- When creating a Crummey trust or any other type of trust, it’s important to give some thought to who should be the trustee. It’s the trustee’s job to manage the trust according to your wishes so you should consider someone that you can rely on to do so. Also, you may consider naming one or more successor trustees as an additional safeguard in case the original trustee passes away or has to be removed due to a breach of fiduciary duty.
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