Crummey Trusts and Intentionally Defective Grantor Trusts (IDGTs) 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 Powerful Estate Tax Strategies: Crummey Trusts and IDGTs both save estate tax, but they’re used in different circumstances.
• 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.
• IDGTs are Tax-Efficient, Flexible Trust Structures: IDGTs are highly estate-tax efficient and make a lot of sense for people who are interested in transferring wealth to future generations and have not used their entire lifetime gift-tax exemptions. A grantor can loan to, sell to, and borrow from an IDGT.

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 an IDGT?

An IDGT is a type of irrevocable trust that is optimized for estate-tax efficiency. A person (the “grantor”) creates an IDGT for the benefit of one or more loved ones — such as children, grandchildren, a spouse, or siblings. The grantor funds the trust using a portion of his or her lifetime gift and estate tax exemption. Once an asset is in the trust, that asset is outside the grantor’s estate and will never be subject to gift tax, estate tax, or generation-skipping transfer tax as long as it remains in the trust. Any resulting appreciation will also be outside the grantor’s estate. Because an IDGT is a “grantor trust,” the grantor has the option to pay the trust’s taxes without that being considered a gift, which is a way to transfer additional wealth to the trust. This makes IDGTs even more estate-tax efficient than they would otherwise be. (You can learn more about IDGTs here.)

IDGT Example

Imagine that Teresa 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 Teresa sets up an IDGT for the benefit of her daughter and then contributes a $6 million asset to it, she will use up $6 million of her lifetime gift tax exemption, but the asset will be able to grow outside of her taxable estate. Teresa will also be able to pay the trust’s income taxes, allowing the trust to generate 9% annual post-tax returns and shifting more wealth out of Teresa’s taxable estate. After 25 years, the IDGT’s assets will be worth about $51.7 million! And if Teresa dies in Year 25, she will have saved her daughter about $20.4 million of tax that she would have otherwise owed.

Benefits of IDGTs

1. Estate Tax Savings: The primary advantage of an IDGT is its ability to use a grantor’s lifetime gift-tax exemption to efficiently shift assets out of the grantor’s estate for estate-tax purposes. The grantor can pay the income tax on the trust’s income, effectively shifting even more wealth into the trust and out of the grantor’s estate. Finally, the grantor can lend to the trust free of any tax consequences — loans are another powerful tool that taxpayers use to shift wealth out of their estates.
2. Asset Protection: An IDGT, 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, IDGTs can help shield inherited assets from a divorcing spouse.
3. Potential Income-Tax Savings: Although IDGTs don’t provide any immediate income-tax savings, they can indirectly save income tax down the line. That’s because an IDGT can make distributions to other taxpayers, who may be in lower tax brackets. The distribution itself will have no tax consequences, but when those taxpayers later sell the asset, they’ll pay less tax than the grantor would have paid, due to that lower tax bracket. IDGTs can also be transformed into “non-grantor trusts,” which can avoid state income tax.
4. Relative Liquidity: Compared to many other tax strategies, IDGTs have little impact on a grantor’s liquidity. Though the grantor will have transferred some portion of his or her assets to the trust, the grantor can borrow from the IDGT without any tax consequences. Moreover, if the grantor’s spouse is a beneficiary, he or she can receive distributions from the IDGT if necessary.
5. Ideal for Illiquid Assets: IDGTs work well whether funded with liquid or illiquid assets.
6. GST Efficiency: A person can allocate generation-skipping transfer (”GST”) tax exemption to a IDGT when the trust is first funded. As a result, the IDGT is a popular form of dynasty trust.

Drawbacks of IDGTs

1. No State Income Tax Savings: IDGTs don’t save state income tax unless they’re converted to non-grantor trusts.
2. Irrevocability: When a grantor makes a gift to an IDGT, the gift is irrevocable (though the grantor can swap assets in and out of the trust at any time, as long as the swapped assets are exchanged for other assets with equal value).
3. No Direct Control: Typically the grantor does not act as trustee of the IDGT, though he or she can remove and replace the trustee at any time, lend money to or borrow money from the trust, get reimbursed by the trust for the trust’s tax liabilities (if the grantor doesn’t want to pay), and swap assets with the trust.

Should You Set Up a Crummey Trust or an IDGT?

Crummey Trusts and IDGTs 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.

On the other hand, conventional IDGTs are better suited for large gifts. IDGTs are highly estate-tax efficient, and gifts to IDGTs are generally GST exempt, which means that IDGTs can make distributions to grandchildren or great-grandchildren without the distributions triggering any GST tax. They are well suited to receiving any type of asset — liquid or illiquid. For most high-net-worth people, an IDGT will be at or near the center of their plan to minimize estate taxes.

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

Conclusion

Crummey Trusts and IDGTs are both powerful tax strategies. Crummey Trusts make sense for people looking to make smaller, annual gifts without using lifetime gift-tax exemption. IDGTs make sense for people who are looking to make larger gifts that use lifetime gift-tax exemption.

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