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D. The Crummey Trust

D. The Crummey Trust

This Trust takes its name from the court decision in the case of Mr. Crummey versus the IRS. The Grantor’s motivation is to create an estate for his/her survivors, through annual gifts, made in a way that discourages the beneficiaries from spending the gifts immediately. The simple way to do that is to make outright gifts, and just tell the recipients of your wish that the money be saved for college, for example. Sometimes, however, a large estate owner has many gifts to make over the years to many people, and lacks confidence that these wishes will be consistently honored by all. This might be due to the immaturity of the beneficiaries. Frequently, too, the estate owner is most concerned about a beneficiary’s spouse pressuring the beneficiary to spend any gift money as soon as the check arrives. In that situation, the Crummey Trust is often used.

This Trust was “invented” by Crummey’s attorney so that his client could make gifts in Trust, but still take advantage of the $12,000 annual (as of 2006) gift tax exclusion from federal gift and estate tax ($24,000 per married couple). That is the important feature of the Crummey Trust because, as we will see, gifts to many other kinds of Trusts do not qualify for the $12,000 annual exclusion.

The Crummey Trust is a means of serving two of the Grantor’s purposes: First, annual gifts are a great way to slowly reduce the taxable estate, while passing along wealth to the next generation. As long as the gifts are made in $12,000 (or less) “chunks” (as of 2006) that qualify for the annual estate and gift tax exclusion, none of the estate owner’s $2.0 million tax shelter is wasted on them, so it can be saved for use at his death. More total wealth is thus protected from tax.

Secondly, when the gifts pay for insurance on the estate owner’s life, the ultimate benefit to the children can be far greater than the amount given, because the policy proceeds at death might be more than the premium dollars paid to that point. For this reason, the Crummey Trust is commonly used as part of the estate owner’s life insurance plan, although it does not have to be.

One faces special problems when making gifts in Trust, however. The $12,000 annual tax exclusion (as of 2006) pertains only to gifts of a present interest in property (e. g., cash, free and clear) – not a future interest. Many people are not aware of this restriction. It means that a gift to many Trusts would NOT qualify for the tax exclusion: Since the terms of many Trusts would not allow the beneficiaries to have unrestricted, immediate access to that gift, it would be a non-qualifying gift of a future interest.

The Crummey Trust is intended to get around this problem. Gifts are made to the Trust, which is irrevocable. (The Grantor cannot end the Trust or take his/her money back, although future gifts can certainly be halted, if desired.) The Crummey Trust beneficiaries are given only a short period of time each year (e.g., 30 days) in which they are permitted by the Trust document to withdraw the gift money from the Trust, free and clear, for completely unrestricted use.

The Grantor hopes they will not do that – and is free to say so – but there can be no formal agreement that the gift money will not be withdrawn. Likewise, there can be no formal requirement that the Trustee pay life insurance premiums with the gift money, although that is very often the Grantor’s stated desire.

The right to withdraw the gift must not be illusory, and the Crummey Trust beneficiaries must be formally advised of it in a letter each year. In the original Crummey case, the court decided that this limited access is enough to make the gift a present interest. On these conditions, the gift to a Crummey Trust qualifies for the annual $12,000 (as of 2006) gift tax exclusion . It is fair to call the Crummey Trust a tax “gimmick,” but one that is perfectly legal and very widely used.

Unfortunately, absolute technical compliance with the law – each and every year – is burdensome. A failure to comply could have terrible tax consequences. Not surprisingly, these Trusts face particularly close IRS scrutiny. Potentially worse, the Crummey Trust rules are subject to modification. As a creature of past and future judicial decisions, rather than statute, these rules are not written in stone.

The Crummey Trust is a very common feature of estate plans designed by good estate planning attorneys. For the above reasons, however, it should be used with caution. We will shortly see that, in many cases, there are other ways to make gifts to the children in Trust, while getting the benefit of the $12,000 (as of 2006) annual exclusion from gift tax.

Again, there is a simple alternative to the Crummey Trust, that should work fine for many families with mature children as beneficiaries: Make an outright gift of cash, without using a Trust, but announce the “hoped for” use of it, e.g., the purchase of insurance on your life, grandchild’s college fund or other investment. If your son-in-law takes the gift and buys a fishing boat instead, maybe then see a lawyer about drafting a Trust. (Of course, any money given to the children this way would be included in their estates – IF they haven’t spent it before they die.)

Remember, though, any asset purchased, including life insurance, will be the child’s property. As such, it is subject to the claims of his/her creditors, and to the risk of being “cashed in” later and spent. That is often why people use Trusts to begin with. It might be that the beneficiaries can be relied upon to at least initially honor the donor’s wishes, but the donor is worried about his children’s’ future temptation to spend the gifts. If this is the situation, consider using an irrevocable Trust, but without the Crummey provision.

In other words, give the money outright, but “hope” it is immediately re-gifted to the Trust for the intended use. Such a gift will qualify for the $12,000 annual gift tax exclusion, without having to jump through the Crummey “hoops.” Once this re-gifting is done, there would be no purpose for the Crummey provision; that year’s gift would be safely in Trust and untouchable by the beneficiaries if they are tempted later to get to it.

(Remember, however, that the child making a gift into a non-Crummey Trust would be using up his/her own $2.0 million federal estate tax shelter. Depending on the likely size of the child’s estate, this might or might not be an important consideration.)

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