What is a Crummey Trust?
A Crummey Trust is a trust created for the purpose of making gifts to the trust without incurring gift tax by utilizing the annual exclusion limit. This is done by granting the beneficiaries the right to withdrawal the gift. The trust is named after the taxpayer who won the right to use this technique in federal court.
How does it work?
In order to make an annual exclusion gift in trust, the gift must be a present interest and not a future interest. This means that the beneficiary must have the right to withdraw the funds for a certain period, typically 30-60 days after the transfer. This withdrawal right is what makes the gift a present interest gift, and therefore eligible for the annual exclusion.
Crummey Letters or Crummey Notices
Beneficiaries of a Crummey Trust are typically sent a “Crummey Letter” or “Crummey Notice” to notify them of their right to withdraw the gift. This notice is required to ensure that the gift qualifies as a present interest gift, and therefore, eligible for the annual exclusion.
Generation Skipping Transfer Tax
It’s important to note that while the exclusion gifts to trust are not subject to gift tax, they may still be subject to the Generation Skipping Transfer (GST) Tax. This is because the GST Tax requires allocation, and there is not a method for allocation on a gift within the annual exclusion amount. Therefore, it’s important to consult with a qualified estate planning professional to determine the best course of action for your particular situation.
Use Case for a Crummey Trust
The most common Crummey Trust is an irrevocable life insurance trust (ILIT). This can be used for estate tax planning.
A Crummey Trust is a valuable estate planning tool that allows for the transfer of assets to a trust without incurring gift tax. By granting the beneficiaries the right to withdraw the gift, the gift becomes a present interest gift and is eligible for the annual exclusion. However, it’s important to be aware of the potential GST Tax implications and to seek the advice of a qualified estate planning professional to ensure the best possible outcome for your estate plan.
Contact us today to schedule a consultation and learn more about how we can help you with your estate planning needs.