Is a Crummey Trust Crummy in Estate Planning?
NO—It saves you money!
Every year, individual people are entitled to gift $14,000 to as many people as they wish. Each $14,000 gift escapes federal estate tax when the giver dies. This means those $14,000 gifts are not subject to federal estate taxes by the Internal Revenue Service.
Mr. Clifford Crummey was challenged by the IRS when he sought the same result of lawfully escaping paying federal estate taxes by gifting $14,000 for each of his children into a trust for his children, i.e. for two children, a total of $28,000 ($14,000 for each child). Mr. Crummey placed in present dollars, $14,000 for each child.
A Crummey Trust is created and funded as follows and must meet the requirements of IRS which include some of the following:
The donor places $14,000 (or in the case of more than one beneficiary, a separate $14,000 for each of the beneficiaries ) in the Crummey Trust. The trustee then writes to each of the beneficiaries (children of the donor), offering each beneficiary the $14,000 that the donor had deposited into the trust for that year. If the beneficiary is a minor, then the Trustee writes the offer letter to the designated guardian of the minor child.
The person who makes the offer in writing to the beneficiary is the trustee. Each year, the trustee may offer the beneficiary or the beneficiary’s guardian (in the event the beneficiary is a minor) the right to either receive the $14,000 or to leave the $14,000 in the Crummey Trust. When the beneficiary reaches age 25, he/she may want all or part of the $14,000 and if all or part of the $14,000 is accepted by the beneficiary, all or part of the $14,000 is removed from the Crummey Trust.
Those previous annual $14,000 offers of gifts that were made and kept in the Crummey Trust remain free of federal estate taxes.
The beneficiary has thirty days to respond in writing that he/she elects to receive the $14,000. If the right to receive the gift is not exercised, that year’s $14,000 gift will remain in the Crummey Trust.
Typically, at age 25, the beneficiary may remove from the Crummey Trust only the previous year’s gift. In this example, the amount of that gift was $14,000.
I have described the annual contribution as $14,000 but the government increases the contribution amount almost every year so that there will be modest increases in the amount that may be deposited annually and, over a long period of time, the annual gifts of $14,000 or more can accumulate and, with interest added, become a very substantial amount.
Neither the parents of the beneficiary nor the trustee can qualify as the guardian of the minor. The parent (the donor) may stop making gifts to the Crummey Trust at any time. This most often occurs when the parent (he or she) does not want his or her adult child to elect to accept the annual $14,000 gift or when the adult child elected to take the $14,000 in the previous year instead of leaving it in the Crummey Trust.
Often the Crummey Trust is funded with whole life insurance.
The Crummey Trust enables a parent to make an indirect gift by setting up trust that will escape federal estate taxes and enable the beneficiary to receive $14,000 per year that will grow markedly and avoid federal estate taxes. Over time the Crummey Trust may create a very substantial benefit for the beneficiary as well as for the donor.
Fred Antenberg is knowledgeable in ways of saving federal estate taxes. If you live in Howard County, Maryland, or a surrounding county in Central Maryland or in Baltimore City, call Fred today for a Free Initial Consultation at 410-730-4404.