What is a Crummey trust?

Crummey is the name of a taxpayer who succeeded in getting an annual exclusion by establishing a trust containing withdrawal rights for the benefit of minor children. A Crummey trust is a special form of trust that contains a provision allowing one or more beneficiaries the right to withdraw the lesser of either the annual exclusion amount or the value of the gift property transferred into the trust. Crummey trusts specify the time each year when the funds can be withdrawn to ensure that the trust beneficiary does not incur gift taxes. Crummey trusts are most commonly created for minors and irrevocable life insurance trusts.

What tax advantages does the Crummey trust have?

It can be disheartening to a successful couple to think of their wealth going to taxes when they die. In fact, at one point in American history, 75 percent of large estates would be taken as estate taxes. The Crummey trust is a creative way around estate taxes and a means of removing funds from your estate without costing your family high taxes.

Every year the IRS allows a certain amount of one’s wealth to be freely gifted to other people. These people can be family or friends. For 2015-2016, the total maximum gifting amount is $14,000 per person that can be given away without any tax consequences. This amount may seem small when you are trying to eliminate a $3 Million estate, but there are other tricks that can be combined, and this is where a Crummey trust comes into play.

A Crummy trust is an irrevocable trust. This means that the funds are permanently moved into the trust. Once there, the funds are considered removed from the couple’s estate. Even better, you can start giving the funds away to your family right away, by allowing them to withdraw the annual gift exclusion amount each year at the same time.

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What is the relationship between Crummey trust and present gift taxes?

Another reason for making a Crummey trust is to avoid the IRS future gift tax requirement. Crummey trusts are considered a section 2503 (c) exception. This means that because the funds can freely be withdrawn as soon as the trust is funded, then the gift is considered a present gift not a future gift. The reason for this difference is that present gifts fall under the gift tax exclusions, future gifts may be included in your estate. So, by establishing a present gift, you entirely eliminate the funds from your estate.

What are the requirements for a Crummey trust?

The requirements for a Crummey trust to be valid are simple. First, the trust must be established for the care of someone under the age of 18. This means that Crummey trusts can only be created for the care of children, grandchildren, great-grandchildren, or any other child. Second, the child must be given notice annually that they have the right to withdraw funds from the trust. Third, they must withdraw an amount annually from the Crummey trust. Many times, children will be instructed to simply withdraw $1 each year during that set time to ensure the trust remains lawful

Case Studies: Utilizing Crummey Trusts for Effective Estate Planning and Tax Strategies

Case Study 1: Preserving Family Wealth With a Crummey Trust

John and Mary, a wealthy couple, wanted to ensure that their hard-earned wealth would benefit their children and grandchildren without incurring hefty estate taxes. They consulted with an estate planning attorney who recommended the establishment of a Crummey trust.

By funding the trust with assets and providing their beneficiaries with the right to withdraw the annual gift exclusion amount, John and Mary effectively reduced the size of their taxable estate. This case study highlights how a Crummey trust can be used to preserve family wealth by leveraging the annual gift exclusion and minimizing tax liabilities.

Case Study 2: Future Gift Tax Mitigation With a Crummey Trust

Sarah, a successful businesswoman, sought to minimize future gift tax obligations while ensuring the financial security of her grandchildren. With the guidance of her estate planning attorney, Sarah established a Crummey trust for each grandchild. By funding these trusts and notifying the beneficiaries of their withdrawal rights, Sarah created a present gift rather than a future gift.

This strategic move allowed Sarah to remove assets from her estate, preventing them from being subject to future gift taxes. This case study exemplifies how a Crummey trust can help individuals mitigate potential gift tax burdens and secure the financial well-being of their loved ones.

Case Study 3: Ensuring Education and Support for Future Generations

Thomas, a successful entrepreneur, wanted to provide ongoing support for his grandchildren’s education and future endeavors. To achieve this, Thomas decided to create Crummey trusts for each grandchild and fund them annually.

By setting a specific time window during which the beneficiaries could withdraw funds, Thomas ensured that his financial support would be dedicated to education and other important life milestones. This case study demonstrates how a Crummey trust can be customized to meet specific objectives, such as facilitating educational opportunities and providing a financial safety net for future generations.

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How to get help

If you have further questions regarding what a Crummey trust is, or are interested in creating a Crummey trust, it’s important that you consult with an estate planning attorney to draft a lawful and beneficial trust.

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