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SmartAsset: What Is a Crummey Trust and How to Use One?

Establishing a trust may be on your estate planning to-do list if you want to preserve your wealth for future generations while potentially enjoying some tax advantages. A Crummey trust is a specific type of trust that can be used to transfer assets to minor children and other people as a strategy to avoid gift taxes.

If you need hands-on guidance, a financial advisor can help you create an estate plan for your family’s needs and goals. 

Crummey Trust, Definition

A Crummey trust, named after Clifford Crummey who first came up with the idea for this type of trust, is designed for making financial gifts to beneficiaries while minimizing gift tax. This type of trust is typically used by parents who want to make financial gifts to minor or adult children, though anyone can establish one on behalf of a beneficiary.

Crummey trusts can offer an alternative way to gift money to minors in lieu of custodial accounts, in which an adult controls assets until the child reaches the age of majority. Unlike a custodial account, which automatically grants ownership of assets to children once they reach legal age, a Crummey trust can offer more flexibility and control over when beneficiaries are allowed to tap into assets.

How a Crummey Trust Works

Crummey trusts are a little different from other types of trusts in terms of taxation and the transfer of assets to trust beneficiaries. When you set up this type of trust, the beneficiary has a set window of time in which they can withdraw assets. For example, they may be able to do so within the first 30 days after the trust is created and funded.

This withdrawal power gives them a present interest in the financial gifts included in the trust. This feature is what allows you to minimize gift taxes or avoid them entirely when giving money to minor children or any other beneficiary.

While the beneficiary could technically withdraw assets from the trust during this window, that would be unlikely in the case of a minor child. Assuming no assets are withdrawn during this period, any financial gifts you’ve made would then stay in the trust to be distributed to the beneficiary or beneficiaries according to the terms and timeline you’ve set. It’s up to the trustee to ensure that the terms of the trust you’ve outlined are followed.

Advantages of Crummey Trusts for Estate Planning

SmartAsset: What Is a Crummey Trust and How to Use One?

The chief advantage of including a Crummey trust in your estate plan is its favorable treatment of financial gifts for tax purposes. Assuming that your beneficiary doesn’t withdraw funds from the trust during the withdrawal period, money added to the trust on their behalf would then qualify for the annual gift tax exclusion.

As of 2022, the annual gift tax exclusion limit is $16,000 per person, per taxpayer. So that means if you’re a married couple filing a joint return, you could technically gift $32,000 per child, per year, without triggering the gift tax. Though, you may still need to file a gift tax return when you prepare your taxes.

The key to making this rule work for you is ensuring that your Crummey trust includes a legitimate withdrawal period in which your beneficiary can exercise his right to take money from the trust. In the case of minor children, withdrawals likely aren’t an issue if you’ve set the trust up for your kids.

With adult beneficiaries, it’s not uncommon to specify that if assets are taken from the trust during this withdrawal period then no further financial gifts will be made. That can be an incentive to keep beneficiaries from taking out trust assets too soon.

Crummey trusts can be used for transferring wealth, and they’re also useful for college planning. For example, you could specify that the money in the trust should be used to pay for college. Or you could specify that your child can’t access the money until they’ve completed college or reached a certain age.

In a nutshell, Crummey trusts can give you control of trust assets and when they’re distributed to your beneficiaries, while also yielding tax benefits. Both can be helpful if you’re looking for another option beyond custodial accounts or 529 college savings accounts to plan for your child’s financial future.

Are There Any Downsides to Crummey Trusts?

If you’re thinking that a Crummey trust could be a useful addition to your estate plan, there are a few potential drawbacks to keep in mind.

First, there’s the cost of setting up and maintaining a Crummey trust. You’ll typically need to pay an attorney to help with creating the trust and the trustee can also collect a fee. The exception would be if you’re acting as the trustee yourself.

That, however, means the trust can be included in your gross taxable estate. For that reason, it may be better to appoint a disinterested third-party to act as a trustee to minimize your own tax liability.

And finally, there’s always the possibility that your trust beneficiary will withdraw money from the trust during the withdrawal window. That would negate any gift tax exclusion benefits you might have enjoyed by leaving the money in the trust.

Since these trusts can be a little more complicated than other types of trusts, it may be helpful to talk through the details with an estate planning attorney. An estate planning attorney can help you determine whether a Crummey trust could work in your favor and if so, what terms to set when creating the trust to make the most of any assets you’re gifting to beneficiaries.

Bottom Line

SmartAsset: What Is a Crummey Trust and How to Use One?

Crummey trusts are just one way to manage the transfer of wealth to future generations. These trusts can offer some tax benefits and if you’re creating one on behalf of minor children, they let you have a greater say in when assets can be accessed compared to a custodial account. Assessing your bigger estate planning and tax planning picture can help you decide where you should be using a Crummey trust to further your financial goals. As with any other type of trust, it’s important to consider the costs of setting up and maintaining the trust over time.

Tips for Investing

  • Consider working with a financial advisor about the pros and cons of Crummey trusts and trusts in general. If you don’t have an advisor yet, finding one doesn’t have to be difficult. 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.
  • In addition to a trust, you should also include other financial tools for your estate plan, such as a last will and testament or advance health care directive. Life insurance and long-term care insurance may also be something you need if you want to preserve assets for your loved ones. Together, these tools can help with shaping a comprehensive plan for managing wealth during your lifetime and after you’re gone.

Photo credit: ©iStock.com/davidf, ©iStock.com/designer491, ©iStock.com/skynesher

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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