Crummey trusts are primarily used by donors who wish to make tax-free gifts to their children, grandchildren or other beneficiaries. While a gift to a trust typically does not qualify for the annual gift tax exclusion because it is not a gift of a present interest, Crummey trusts provide the beneficiary, or his or her guardian if the beneficiary is under age 18, the right to make a withdrawal of the gift for a certain period of time after the gift is made, such as 30 to 60 days. If the withdrawal right is not exercised within the specified time frame, the right of withdrawal lapses and the gifted property is accumulated in the trust until such time as it is distributed according to the terms of the trust. For more on the gift tax, see gifts and gifting.
The donor may make the child or his parent aware that future annual gifts will not be made to the trust if the annual gift is withdrawn during the right of withdrawal period. However, consult your lawyer before discussing this with the beneficiary or the beneficiary's guardian, to avoid violating IRS regulations. Through the use of this type of trust, the donor is able to make gifts to the trust which qualify for the annual gift tax exclusion while still having a reasonable amount of assurance that the beneficiary will only access the trust funds at a date in the future when the donor feels the beneficiary is capable of managing them. See
silent trusts.A Crummey trust must be drafted by an experienced and knowledgeable attorney. If a tax-saving trust is not properly drafted and administered, there can be serious estate tax, gift tax, and other tax consequences. Therefore, a Crummey trust should never be drafted by the donor using online forms or do it yourself books. In addition, when you retain an attorney to prepare your Crummey trust, ask how many similar types of trusts he or she has prepared. If estate planning is not the attorney’s principal area of expertise, consult another lawyer.Another type of trust frequently used to make gifts to minors is a Section 2503c trust. For information on the advantages and disadvantages of this type of trust, see Minor’s Trust.
Disadvantages of Crummey Trusts
1. Each time the donor makes a gift to a Crummey trust, notice of a right of withdrawal must be provided to the beneficiary or the beneficiary’s parent. See
right to information about trust. The administrative aspects of this type of trust may be too burdensome for some donors.2. A Crummey trust is irrevocable. If the donor changes his mind for any reason, such as a change in financial status or a dispute with the beneficiary, the donor cannot change the beneficiary or get back property already gifted to the trust. See irrevocable trusts.3. A Crummey trust may affect the beneficiary’s ability to qualify for financial aid for college.4. Because a Crummey trust is a very complex type of trust that must be drafted by an attorney, it is more expensive to set up than other methods of making gifts to children, such as a 529 plan or a Uniform Transfers to Minors Act account.For a list of other estate planning strategies to pass wealth to your children and other heirs, refer to the Pennyborn.com Parent’s Estate Planning Guide.This article was updated on March 29, 2016.
What is a Crummey Trust?
A Crummey trust, also called a right of withdrawal trust, is a type of irrevocable trust used by donors to make gifts to a trust using their annual gift tax exclusion. See 2020 Gifting Limits. One of the primary advantages of this type of trust is that gifted property can remain in the trust long after the beneficiary attains age 21 if the property is not withdrawn by the beneficiary or the beneficiary’s guardian during the right of withdrawal period. Crummey trusts are named after the taxpayer who was the subject of a court case involving this type of trust. See Crummey v. Commissioner, 397 F. 2d 82 (9th Cir. 1968).
Advantages of Crummey Trusts
1. Gifting assets to a Crummey trust allows the donor to reduce the size of his taxable estate to minimize estate taxes.
2. A parent, grandparent or other donor can make tax-free gifts to a Crummey trust for the benefit of a child or grandchild up to the amount of the annual gift tax exclusion.3. A Crummey trust gives the donor control over the timing of distributions to beneficiaries with respect to gifts that are not withdrawn during the initial right of withdrawal period. The beneficiary of a Crummey trust does not need to be given an opportunity to withdraw the entire balance of the trust at age 21, so accumulated trust assets can be held in trust for the beneficiary until he or she is older and more mature.
4. While there are restrictions on the types of property that can be used to fund a UTMA Account, there are no such restrictions with a Crummey trust. See Gifts to Minors UTMA.5. While some other methods of gifting to minor children allow only one child to be named as beneficiary, a Crummey trust can have multiple beneficiaries.6. Unlike a 529 Account or college savings plan, there is no penalty if the funds in a Crummey trust are used for expenses other than higher education. See college funds.
Factors to Consider Before Making a Crummey Trust
A parent, grandparent or other donor should give careful consideration to a variety of factors before establishing a Crummey trust, including the following:
the total dollar amount the donor plans to gift to the beneficiary during the donor’s lifetime;
how the donor wants gifted assets to be used;
the amount of control the donor wishes to exercise over the gifts;
the other beneficiaries for whom the donor wishes to provide in his estate plan; and
the types of property the donor wishes to gift.
There are several different methods of making gifts to children. Consult an estate planning lawyer about your unique situation and objectives before deciding on a particular type of trust or account.
Drafting Crummey Trusts
If you are drafting a Crummey trust, it is important to be aware of the latest U.S. tax court cases. Crummey trusts have been the subject of recent litigation and such cases may impact how your Crummey trust should be drafted. For example, Mikel v. Commissioner, T.C. Memo 2015-64 is a 2015 case that involved arbitration clauses and in terrorem clauses in a Crummey trust. See
No-Contest Clauses. This case illustrates the importance of reviewing changes in the law before drafting an estate planning trust or related types of documents.
Using Trusts to Make Gifts to Minors
For further reading on Crummey trusts and sample Crummey trust provisions, refer to the book, Gift Trusts for Minors Line by Line: A Detailed Look at Gift Trusts for Minors and How to Create Them to Meet Your Needs, by Patricia H. Char and Sandra K. Newman. This definitive trust law guide features sample trust agreement forms and a side by side comparison of the Crummey Trust and the 2503c Minor's Trust. Referencing an estate planning forms book like Gift Trusts for Minors may be helpful when creating customized trusts to hold assets for the benefit of children. This book also features model language for drafting a notice of withdrawal right.
INFORMATION ON THIS SITE, INCLUDING ARTICLES, ESTATE PLANNING FORMS, AND THE ESTATE PLANNING BLOG, DOES NOT CONSTITUTE LEGAL, FINANCIAL OR TAX ADVICE. Pennyborn.com is not a law firm and is not a substitute for a lawyer. Your use of this site does not create an attorney-client relationship. Information on this site is for educational purposes only and may not be accurate, complete or up to date.
For information about Pennyborn.com and how to advertise on this website Contact Us.