The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
Crummey trusts are highly tax-advantaged. They also have a number of non-tax benefits. If you’ve read our overview of Crummey trusts — “Crummey Trusts: Everything You Need To Know” — you’re familiar with those tax and non-tax benefits. But Crummey trusts aren’t the only way for someone to use his or her gift-tax annual exclusion. There are three other common strategies:
The purpose of this article is to flesh out these alternative strategies, and compare them to the Crummey trust approach.
Here are the top five reasons people set up these trusts:
Crummey trusts do have one downside: cost. Traditionally, providers have charged $5,000-$15,000 for trust set-up, and then additional amounts to handle and track Crummey notices. Fortunately, with Valur, setting up a Crummey trust is free, and maintaining it is inexpensive.
Making outright gifts to an individual to use annual exclusion is marginally cheaper than setting up a Crummey trust. It is also a little simpler — though nowadays setting up and administering these trusts is pretty simple! However, outright gifts don’t receive any creditor protection, are less tax efficient than Crummey trusts over the long term (because you can’t pay the individual beneficiary’s income taxes), and require you to forfeit all control over the gifted funds (so the beneficiary could spend all the money on a weekend in Vegas).
In contrast, Crummey trusts are highly estate-tax efficient, are protected from creditors, and can be structured so that the beneficiary can’t immediately blow all of the money in the account, even if the beneficiary is an adult.
If your beneficiaries are minors, outright cash gifts won’t really work anyways, since minors can’t open bank or brokerage accounts.
There are two big differences between Crummey trusts and custodial accounts. The first is that custodial accounts can only be set up for minors, so if your beneficiaries are adults, setting up a custodial account won’t be possible. The second difference is that custodial accounts terminate when the child reaches early adulthood — usually either age 18 or age 21. That means that when the child is college-aged, he or she will gain full access to, and control over, the money. The assets inside the custodial account receive some creditor protection, but once the funds are paid out to the beneficiary, they become subject to the beneficiary’s creditors.
Crummey trusts solve these problems. Anyone can be a beneficiary of one of these trusts, and Crummey trusts can last for a beneficiary’s entire life. As discussed above, Crummey trusts also have a feature that allows them to be treated as tax residents of low-tax states, potentially saving state income tax in some cases.
Custodial accounts can receive slightly more favorable federal income-tax treatment than Crummey trusts, thanks to the kiddie tax rules. As a result, setting one up may save you a few hundred dollars per year in income tax. On the flip side, custodial accounts may complicate your personal income-tax filings.
A 529 plan is a type of tax-advantaged account intended to help people save for educational expenses. Investment returns inside 529 plans are exempt from income tax, provided that the money goes toward education.
Both Crummey trusts and 529 plans use gift-tax annual exclusion. Sometimes people are unable to fund Crummey trusts because they’ve already used that year’s annual exclusion to fund a 529 plan for the same beneficiary. Other times, people have difficulty deciding between funding one type of account or the other.
It often makes sense to fund both. For example, you might set up a 529 plan and fund it when your children are babies, and then begin using annual exclusion to fund Crummey trusts once they reach kindergarten. In general, you don’t want to overfund a 529 plan since the funds are restricted to educational uses. What makes the most sense in any given situation will depend on the specific facts and circumstances.
Crummey trusts are a no-brainer for anyone who is worried about estate taxes. Thanks to their non-tax benefits, they can even make sense for people who aren’t particularly concerned about estate tax. If you’re interested in setting up a Crummey trust, you should set up time to chat with us here.
We’ve built a platform to give everyone access to the tax and wealth-building tools typically reserved for wealthy individuals with a team of accountants and lawyers. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures. With Valur, you can build your wealth more efficiently at less than half the cost of competitors.
From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!
