Investor Education | Crummey trust: better than it sounds

Don’t be discouraged by the name “Crummey trust.” As a matter of fact, this estate-planning technique can produce benefits far more pleasant than its name implies.

Background: One of the basic ways to save estate taxes is to utilize the annual gift-tax exclusion during your lifetime. Currently, this provision enables you to give away up to $14,000 each year to a donee without paying any federal gift tax ($28,000 for a joint gift by a married couple). For example, if you have two adult children and three grandchildren, you and your spouse can give each one $28,000 for a grand total of $140,000 in tax-free gifts.

This is a relatively simple way to reduce your taxable estate. (Gifts in amounts above the annual exclusion may be sheltered from gift tax by the lifetime gift-tax exemption of $5.43 million in 2015, but this reduces the effective estate-tax shelter.)

When you make an outright gift to a beneficiary like a child, however, you give up control over the assets. So you run the risk that the money may be squandered — especially if the child is young or irresponsible. Instead, if the assets are transferred to a trust with the child as a beneficiary, you can appoint a trustee to manage the property. After a set period of time (e.g., when the child reaches a certain age), the assets are distributed to the child.

The problem: To qualify for the annual exclusion, the gift must be a “present interest.” When a gift is placed in a trust and not distributed to the beneficiary for a period of years, it is generally considered a “future interest.” This results in a taxable gift. The Crummey trust (named for the case that authorized its use) was devised as a solution to this problem. Typically, the beneficiary of the trust is granted the right to withdraw trust principal shortly after it is transferred to the trust. Because the beneficiary has a present right of withdrawal, the gift qualifies for the gift-tax exclusion.

Of course, if you are the trust donor, you may not want your recipient to withdraw the assets. But these so-called “Crummey powers” are usually not exercised. While the beneficiary must be notified of the withdrawal power, he or she may be too young to understand the implications. Since the trust principal does not have to be paid out when the beneficiary reaches a certain age, the trust can continue for a long period of time.

Be aware that there are several variations on this theme. Typically, this is not a do-it-yourself proposition. Setting up and administering a Crummey trust usually requires the expert assistance of a professional adviser.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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Investment Consultant Tam Hubert, CFP®, CFA

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