Leverage Advantages Of The Crummey Trust

Many have never heard of a Crummey trust. Don’t worry; it’s not as bad as it sounds. They’re named after an individual involved in a court case establishing their guidelines . . . not their usefulness. Crummey trusts can actually be quite effective in helping investors achieve estate-planning goals.

For starters, the federal government allows a donor to transfer a present-interest gift of $10,000 per donee per year (the annual exclusion) free of gift tax. “Present interest” means that the donee must have the right to present use of the corpus. Transfers to trusts that would not ordinarily qualify for the $10,000 per donee exclusion because a trust gives a beneficiary the right to future, not present, use of the assets are allowed with a Crummey trust.

Crummey trusts permit $10,000 to be counted as a present-interest gift if the beneficiaries of the trust are given annual notices allowing a 30-day window to withdraw their portion of the principal of the trust.

Gifting $10,000 into the trust in the name of contingent beneficiaries and issuing Crummey notices to such beneficiaries can leverage the use of annual exclusions. These contingent beneficiaries have no real interest in the trust other than their power of withdrawal. Therefore, Crummey trusts offer the potential to withdrawal more assets out of one’s gross estate than most other gift alternatives.

A Crummey power inserted in a trust document may present the most effective means available to accomplish the estate planning objectives of:

  1. Taking the utmost advantage of annual exclusions,
  2. Leveraging assets passing to heirs by using life insurance and
  3. Excluding the value of the trust upon the donor’s death from their gross estate.
For example, a husband and wife, both 30 years of age, with four children as their primary beneficiaries and 11 contingent beneficiaries (close relatives without withdrawal power) can make annual exclusion gifts on behalf of the beneficiaries. This amounts to 15 $20,000 gifts ($300,000) distributed annually without incurring any gift tax.

Also, by using Crummey provisions with an Irrevocable Life Insurance Trust, donors can effectively leave significant amounts of liquid assets to loved ones at zero gift and estate tax cost. The ILIT works as follows:. The trust purchases a life insurance policy on the life of the donor/insured. The donor makes annual exclusion gifts to the trust equal to the policy premiums. Each beneficiary gets a Crummey power. The beneficiaries are given Crumney notices – announcement of their withdrawal rights. If no one exercises their withdrawal rights, the trustee makes the policy premium payments, which, coincidently, will zero out any trust income.

The advantages are:

  • There is no current income of the trust to be taxed at the compressed trust rates.
  • With ownership of the insurance policies vested in the trust, there are no estate tax implications to either the client or his or her beneficiaries.
  • Funding the trust with insurance policies will provide a source of instant liquidity upon the death of the client.
The Crummey power inserted into a trust is a tremendously powerful gift-giving strategy. It allows the donor to transfer assets out of his or her estate at minimal, if any, gift tax cost while giving the donor the flexibility to accumulate or distribute assets to loved ones when he or she wishes through the trust.

Lynn Siewert is the Principal of Advanced Corporate Planning and Branch Manager of the Vancouver, Washington Office of Supervisory Jurisdiction, Licensed through First Allied Securities, Inc. Member NASD/SIPC

NOTE: ALL information contained in this site is for illustration purposes only, and by NO means should be considered individual tax or legal adivce under any circumstances whatsoever!

Lynn R. Siewert AIMC
Pension Consultant |  Branch Manager
CA Insurance License #00B00579
2005 E. Evergreen Blvd
Vancouver, WA 98661
Ph: 360-750-9626

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