Crummey Trusts and Grantor Retained Annuity Trusts (GRATs) are two popular types of irrevocable trusts. How do you know which one is right for you? This article explains what these trusts are and when they make sense.

Key Highlights and Takeaways

• Two Similar Estate Tax Strategies: Crummey Trusts and GRATs have a lot in common: both help avoid estate tax without using the donor’s lifetime gift tax exemption. Often, individuals will employ both strategies, which are complementary. But there are also key differences between these structures.
• Crummey Trusts Optimize Around the Gift Tax’s Annual Exclusion: Crummey Trusts are designed to receive gifts of up to the donor’s “annual exclusion.” In 2024, a donor can give a donee up to $18,000 per year, increasing to $19,000 per year in 2025.
• GRATs Efficiently Transfer Volatile Assets: GRATs are ideal for people with volatile, liquid assets who are looking to transfer assets to their children. GRATs transfer assets using an IRS-sanctioned formula where returns above a certain baseline are allowed to pass to the donor’s heirs.

What is a Crummey Trust?

A Crummey Trust is a type of irrevocable trust that is designed to receive gifts that use up the donor’s gift-tax annual exclusion. In 2024, a donor can give a donee up to $18,000 per year without exceeding the annual exclusion amount. That amount will increase to $19,000 per year per donee in 2025.

Typically, a donor (the “grantor”) creates a Crummey Trust for each loved one whom he or she would like to help. For example, a grantor might create three Crummey Trusts: one for each of her three grandchildren. The grantor funds each trust — usually with liquid assets like stock, bonds, or cash — annually, in an amount up to the annual exclusion amount. Once an asset is in the trust, that asset is outside of the grantor’s estate and will not be subject to estate tax on the grantor’s death. Any resulting appreciation will also be outside the grantor’s estate. Because most Crummey Trusts are “grantor trusts,” the grantor has the option to pay the trust’s taxes, which is a way to transfer additional wealth to the trust. This makes Crummey Trusts even more estate-tax efficient than they would otherwise be. (You can learn more about Crummey Trusts here.)

Crummey Trust Example

Imagine that Serena is a New York City resident with a $25 million net worth and a portfolio that generates 9% annual returns (divided equally between capital appreciation and cashflow). If Serena sets up Crummey Trusts for each of her three grandchildren, and then contributes the annual exclusion amount to each trust each year, she’ll be able to move a significant amount of wealth out of her estate — $54,000 or more per year, plus appreciation. Serena will also be able to pay each trust’s income taxes, which means the trusts will be able to keep their entire 9% pre-tax returns while shifting even more wealth out of Serena’s taxable estate. After 25 years, the Crummey Trusts’ assets will be worth about $6.4 million. And if Serena dies in Year 25, she will have saved her family about $2.8 million of tax because she set up these three Crummey Trusts.

Benefits of Crummey Trusts

1. Estate Tax Savings: The primary advantage of a Crummey Trust is its ability to transfer assets to a grantor’s beneficiaries free of gift tax or estate tax.
2. Asset Protection: A Crummey Trust, as a separate legal person, is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win a lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, Crummey Trusts can help shield inherited assets from a divorcing spouse.
3. Potential Income-Tax Savings: Although Crummey Trusts are generally set up as “grantor trusts,” which means they are ignored for income-tax purposes, they can be set up as “non-grantor trusts,” which have the ability to avoid state income tax. They can also distribute appreciated property to beneficiaries who are in lower tax brackets than the grantor. If those beneficiaries then sell the appreciated asset, they will pay a lower tax rate than the grantor would have if the grantor had been the seller.
4. Relative Liquidity: Compared to many other tax strategies, Crummey Trusts have little impact on a grantor’s liquidity. As long as the trust is a grantor trust, the grantor can borrow from the trust or swap assets with the trust without any tax consequences.
5. Series of Smaller Gifts: Some people prefer making lots of small annual gifts versus making a few large gifts, since the smaller gifts are less noticeable and less likely to have a significant immediate impact on the grantor’s financial situation.

Drawbacks of Crummey Trusts

1. GST Inefficiency: Crummey Trusts are generally not exempt from the generation-skipping transfer (”GST”) tax, so in order to avoid GST tax, they tend to end when the beneficiary dies. This means that Crummey Trusts don’t function as dynasty trusts, unlike many intentionally defective grantor trusts and other popular trust types. Still, Crummey Trusts can be a powerful estate-tax strategy. They are often — maybe not at first, but eventually — paired with other strategies.
2. Irrevocability: When a grantor makes a gift to a Crummey Trust, the gift is irrevocable.
3. Not Ideal for Illiquid Assets: Crummey Trusts work very well when funded with liquid assets, but they are often not the best fit for gifts of illiquid assets, like real estate or privately held stock. When gifting illiquid assets to an irrevocable trust, it’s important to get the assets appraised for tax purposes. Appraisals cost money. The cost of an appraisal is negligible when the asset being gifted is worth millions of dollars, but it can be quite significant if the asset is only worth $15,000. Liquid assets like public stock don’t need to be appraised at all.
4. No Direct Control: Typically the grantor does not act as trustee of a Crummey Trust, though he or she can remove and replace the trustee at any time.

What is a GRAT?

A GRAT is a type of irrevocable trust that moves assets out of a person’s taxable estate without using that person’s lifetime gift and estate tax exemption. It’s a powerful gift and estate tax strategy. The basic idea is that a person (the “grantor”) transfers an asset to the GRAT and sets an annuity term (usually two years). A portion of the principal is returned to the grantor each year until the end of the term. The exact size of each annuity payment is based on a standardized formula, but basically the grantor is entitled to receive the full amount of the original principal amount plus interest that is based on the government’s interest rate, known as the “7520 rate.” By the end of the term, the original principal (plus some interest) has been returned to the grantor. Any remaining amount in the trust passes to the grantor’s named beneficiaries free of estate tax or gift tax. The GRAT’s magic comes from the ability to transfer wealth to beneficiaries free of tax by simply funding the trust with assets that outperform the 7520 rate. The 7520 rate is equal to roughly 120% of the yield on a 7-Year Treasury Note, so it typically comes out to somewhere in the 3%-5% range. (You can learn more about GRATs here and you can estimate the potential returns here.)

GRAT Example

Imagine that Christine is a New York City resident with a $25 million net worth and a portfolio that generates 9% annual returns (divided equally between capital appreciation and cashflow). If she contributes $6 million to a two-year GRAT when the 7520 rate is 4%, the GRAT will pay her approximately $6.3 million over the course of the first two years. But because the GRAT’s assets are appreciating at 9% while the 7520 rate is only 4%, there will be a remainder left over at the end of Year 2. That remainder — about $500,000 — will pass to Christine’s remainder beneficiary, perhaps a grantor trust for the benefit of her daughter. If Christine decides to set up “Rolling GRATs” — that is, GRATs where the annuity payments are used to fund new GRATs — and she keeps setting up new GRATs each year for 25 years and naming the grantor trust for her daughter as the remainder beneficiary, by Year 25 she will have transferred about $33.1 million to trusts for her daughter, saving her daughter the equivalent of about $14.5 million of tax.

GRATs funded during two-year periods where Christine’s investments performed poorly would fail, but Christine and her daughter would be no worse off than if Christine hadn’t funded the GRAT (aside from the cost of setting up the GRAT).

Benefits of GRATs

1. Estate Tax Savings: The primary advantage of a GRAT is its ability to transfer assets to a grantor’s beneficiaries free of gift tax or estate tax.
2. Ideal for Volatile Assets: Compared to other estate-tax strategies, GRATs are particularly well suited for transferring highly volatile assets. In fact, GRATs thrive on volatCrummey Trusty. On average, a GRAT funded with highly volatile assets will generally outperform a GRAT funded with less volatile assets even if the overall percentage growth of the underlying assets is the same.
3. Downside Protection: If GRATs had a motto, it would be “Heads, you win, tails you don’t lose.” A GRAT funded with an asset that drops in value will fail to pass on assets to the beneficiaries, but that failure won’t leave the beneficiaries any worse off than they would have been if the GRAT hadn’t been created. In contrast, with other estate-tax strategies, transferring assets that later drop in value can be tax inefficient.
4. Potential Income-Tax Savings: Although GRATs don’t provide any immediate income-tax savings, they can indirectly save income tax down the line. That’s because a successful GRAT can transfer assets to other taxpayers, who may be in lower tax brackets. When those taxpayers later sell the asset, they’ll pay less tax than the grantor would have paid, due to that lower tax bracket.
5. Relative Liquidity: Compared to many other tax strategies, GRATs have little impact on a grantor’s liquidity. During the term of the GRAT, a portion of the grantor’s assets are in the trust, but the grantor can always borrow from the GRAT without any tax consequences.
6. Direct Control: The grantor can act as trustee of the GRAT during the GRAT term, which means he or she retains direct control over the trust’s assets and how they are invested.

Drawbacks of GRATs

1. GST Inefficiency: A person cannot allocate GST tax exemption to a GRAT during the annuity period. This makes GRATs less suited to transferring assets to grandchildren or more distant descendants than intentionally defective grantor trusts or other dynasty trusts. Still, GRATs can be a powerful estate-tax strategy alongside other, more GST-efficient strategies.
2. Irrevocability: When a grantor makes a gift to a GRAT, he or she is forfeiting the right to the excess growth above the 7520 rate. That said, if desired, a grantor can prevent too much wealth from being shifted to his or her beneficiaries by “swapping” assets out of the GRAT before the end of the term.
3. Not Ideal for Illiquid Assets: GRATs work very well when funded with liquid assets, but they are often not the best fit for gifts of illiquid assets, like real estate or privately held stock. Illiquid assets in a GRAT will need to be valued at least three different times (upon funding, upon the first anniversary of funding, and upon the second anniversary of funding). The IRS can potentially challenge each valuation. In contrast, liquid assets like public stock don’t need to be appraised at all.

Should You Set Up a Crummey Trust or a GRAT?

Crummey Trusts and GRATs both save estate tax, but they’re used in different circumstances.

The gift tax’s annual exclusion is a major tax benefit, and Crummey Trusts help people maximize the value of that tax benefit. If you are looking for a way to make relatively small, annual gifts to trusts that are protected from creditors and tax efficient, Crummey Trusts may be a good fit. But Crummey Trusts are not suited for very large gifts because they’re generally not designed to be dynasty trusts that are exempt from the GST tax.

GRATs are ideal for people with volatile assets that are easy to value, like individual stocks or crypto, who are looking to transfer assets to their children. GRATs are particularly useful for people who have limited unused lifetime gift tax exemption, since GRATs don’t require lifetime gift tax exemption in order to work.

It is important to note that there are lots of other gift and estate tax strategies that may make more sense than a GRAT or a Crummey Trust, depending on circumstances. Those strategies are also worth exploring. Moreover, GRATs and Crummey Trusts are not mutually exclusive; some people set up both.

Conclusion

Crummey Trusts and GRATs are both powerful tax strategies. Crummey Trusts make sense for people looking to make smaller, annual gifts without using lifetime gift-tax exemption. GRATs make sense for people with volatile assets who are looking to transfer assets to a trust without using any lifetime gift tax exemption.

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