The Internal Revenue Code permits each individual to gift a certain amount in any given calendar year (up to $18,000 in 2024) to an unlimited number people without owing any gift tax or using any of their lifetime gift tax exemption. In order to qualify for this gift tax “annual exclusion,” the donor must give the beneficiary a “present interest” in the gifted property. An outright gift to a beneficiary will always count, but a gift to an irrevocable trust will not count unless the trust is what’s known as a “Crummey trust” — a special type of irrevocable trust where the beneficiaries are given a temporary right (usually lasting 30-60 days) to withdraw gifted amounts. This temporary withdrawal right, known as a “Crummey power,” qualifies the gift as a present-interest gift. Typically, the beneficiaries don’t actually withdraw the money, which remains in the trust after the withdrawal period ends.
What are Crummey notices?
To make this strategy work, the donor or trustee has to send the beneficiaries a written notice (called a “Crummey notice” or “Crummey letter”) each time a gift is made, telling them about their temporary withdrawal right. The IRS says this notice is required for the gift to qualify for the annual exclusion. The Crummey notices have to be sent out like clockwork every year, and records need to be kept proving the notices were sent and received. If the notices aren’t handled properly, the IRS could disallow the annual exclusion and say that gift taxes are owed or that the gift used a portion of the donor’s lifetime exemption.
Where does the name “Crummey” come from?
The name comes from a 1968 court case called Crummey v. Commissioner of Internal Revenue. In that case, the Ninth Circuit Court of Appeals held that a similar arrangement allowed gifts made in trust to count as gifts of present interests, rather than gifts of future interests. Ever since, lawyers have been copying this approach.
What sorts of trusts include Crummey powers?
Any irrevocable trust can be a Crummey trust provided it includes the necessary Crummey language. Often, individuals will set up Crummey trusts in order to take advantage of the gift tax annual exclusion while at the same time preventing the beneficiaries from getting full access to the money before they’re ready to manage it. Crummey powers are often included in Irrevocable Life Insurance Trusts (sometimes called ”ILITs”), so that the donor can transfer cash to the trust to pay annual insurance premiums without using any lifetime gift tax exemption.
Summary: The importance of Crummey trusts
Crummey trusts offer the following benefits:
- They allow donors to make gifts to trusts without using any gift tax exemption, increasing the amount that a donor is able to get into trusts for the benefit of his or her children, grandchildren or other loved ones. Because the gift amounts, and any subsequent appreciation, is outside the donor’s estate, these gifts help reduce the donor’s future estate tax liability.
- Compared to outright gifts, gifts to Crummey trusts give donors some measure of control over when the beneficiaries receive money. The trust’s terms can determine when — or if — the beneficiaries get distributions from the trust in the future.
The main downside is the administrative work of sending out the withdrawal notices every year and making sure it’s all documented. If you miss a step, the IRS could challenge the arrangement. But when set up and maintained properly, a Crummey trust can be a very effective tool, especially for individuals with larger estates looking to maximize their gift tax annual exclusions.
That’s where Valur comes in: Valur’s automated platform ensures that Crummey notices are made on time and documented appropriately!
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