A Crummey trust is a type of irrevocable trust that allows the creator (grantor or settlor) to be able to distribute funds from the trust account to beneficiaries. A beneficiary under this sort of arrangement receives an immediate financial benefit, allowing them to begin taking distributions, within 30 days after acceptance by the trustee.
History of the Crummey Trust
The Crummey trust was named after Clifford Crummey who came up with this idea back in the 1960s. Clifford Crummey had set up a trust in the manner as how the Crummey trust works but the IRS denied him the annual gift tax exclusion. Normally, for gift tax exclusions to work, beneficiaries should have a “present interest” to the gift – a thing which the IRS argues to be unmet by what Crummey had set up. However, the U.S. tax court disagreed with the IRS and favored Crummey. Since then, the “Crummey Power” has stuck and the trust has been exercised by many.
How Does the Crummey Trust Work?
For the year 2021, the annual gift tax exclusion limit is $15,000 per person, per taxpayer. So, in the case of married couples filing jointly, the limit extends to $30,000 per child, annually. As mentioned, it is necessary for beneficiaries to have a “present interest” to a gift in order for a gift tax exclusion to work. Thus, in a Crummey trust, the grantor will offer the receiver of the gift a window of time to take control of the gift immediately. The window of time is usually 30 days. Should the receiver fail to withdraw a portion of the funds within the given window of time, the gift becomes part of the trust and will then be subject to the specific distribution conditions set in the trust. Even if the receiver fails to take hold of the funds within the given window of time, the gift tax exclusion will still apply because the window of time has been given in the first place.
Pros and Cons of a Crummey Trust
The advantages of this particular type of trust are that it allows people to transfer assets into an irrevocable structure without incurring huge amounts in capital gains taxes while also allowing for future distributions from principal to children after they reach adulthood. Another great benefit of this type of trust is that it can also serve as an estate planning tool for those who want to avoid estate tax as the property gifted will be excluded from their taxable estate. The downside is that if your beneficiary fails to accept funds during the given window period, you will not get to use the annual gift exclusion for that given tax year. Also, there are costs to be considered in setting up this kind of trust which you should keep in mind.
The Bottom Line
If you wish to make a financial gift but do not want to be tied down by rules and stipulations, a trust may be the right choice for your needs. The Crummey trust, specifically, is a great option because it allows for peace of mind that the funds put into the trust will be used as intended while also providing beneficiaries with ultimate control over how those funds are ultimately spent.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.