Crummey Trusts and Non-Grantor Trusts 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 Non-Grantor Trusts 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.
• Non-Grantor Trusts Avoid Both State Income Tax and Estate Tax: A Non-Grantor Trust can be a valuable tool for taxpayers in high-tax states who are looking to transfer wealth to future generations, as Non-Grantor Trusts can avoid not only future estate tax but also state income tax.

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 Non-Grantor Trust?

A Non-Grantor Trust is a type of irrevocable trust that is treated as a separate taxpayer for income-tax purposes. By setting one up in a no-tax state, taxpayers can avoid state income tax. Properly structured Non-Grantor Trusts also help families avoid estate tax, since assets gifted to them (and any appreciation after the date of the gift) will be outside the grantor’s estate for estate-tax purposes.

Typically, a person (the “grantor”) creates a Non-Grantor Trust for the benefit of one or more loved ones — such as children, grandchildren, 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 of 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. (You can learn more about Non-Grantor Trusts here.)

Non-Grantor Trust Example

Imagine that Jim 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 Jim sets up a Non-Grantor Trust and then contributes a $6 million asset to it, he will use up $6 million of his lifetime gift tax exemption, but the asset will be able to grow outside of his taxable estate. After 25 years, the Non-Grantor Trust’s assets will be worth about $33.5 million! And if Jim dies in Year 25, he will have saved his heirs about $15.2 million of tax relative to the counterfactual where he hadn’t funded the Non-Grantor Trust.

Benefits of Non-Grantor Trusts

1. Estate Tax Savings: Non-Grantor Trusts use a grantor’s lifetime gift tax exemption to efficiently shift assets out of the grantor’s estate for estate-tax purposes. However, Non-Grantor Trusts are a bit less estate-tax efficient than IDGTs.
2. State Income Tax Savings. In California, the top marginal state income-tax rate is 13.3%. In New York City, the top rate is 14.776%. In South Dakota, the top marginal state income-tax rate is 0%. Setting up a Non-Grantor Trust in a state like South Dakota, and then putting investments that generate lots of investment income inside of that trust, can save a grantor’s family a lot of income tax over time.
3. Asset Protection: A Non-Grantor 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, Non-Grantor Trusts can help shield inherited assets from a divorcing spouse.
4. QSBS Stacking. For founders or early startup employees who have QSBS-eligible stock, perhaps the biggest benefit of Non-Grantor Trusts is the additional QSBS exclusion they receive. Non-Grantor Trusts are eligible for their own $10 million QSBS exclusions — a single QSBS-stacking Non-Grantor Trust can save a family millions of dollars of capital gains tax.
5. Various Federal Deductions. Non-Grantor Trusts get their own federal deductions and exemptions such as the $10,000 state and local income tax deduction, excess business loss deductions, mortgage interest tax deductions, Section 199A small business tax deductions, and more. Collectively, these tax benefits can be quite significant.
6. Ideal for Illiquid Assets: Non-Grantor Trusts work well whether funded with liquid or illiquid assets.
7. GST Efficiency: A person can allocate generation-skipping transfer (”GST”) tax exemption to a Non-Grantor Trust when the trust is first funded. As a result, the Non-Grantor Trust is a popular form of dynasty trust.

Drawbacks of Non-Grantor Trusts

1. Illiquidity: When the grantor makes a gift to a Non-Grantor Trust, he or she loses access to the assets in the trust. Unlike with IDGTs or some other trust types, with a Non-Grantor Trust, the grantor cannot “swap” or borrow assets without income-tax consequences.
2. Irrevocability: When a grantor makes a gift to a Non-Grantor Trust, the gift is irrevocable.
3. Spouse Cannot Be Beneficiary: Generally the grantor’s spouse cannot be the beneficiary of a Non-Grantor Trust.
4. Potentially Higher Federal Tax Brackets: Non-Grantor Trusts are taxed at the highest federal tax bracket on annual income above a few thousand dollars. If the grantor is not a high-bracket taxpayer, gifting assets to a Non-Grantor Trust may actually increase the effective federal tax rate paid on any income generated by assets inside the trust.
5. No Direct Control: The grantor cannot act as trustee of the Non-Grantor Trust, though he or she can remove and replace the trustee at any time.

Should You Set Up a Crummey Trust or a Non-Grantor Trust?

Crummey Trusts and Non-Grantor Trusts 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, Non-Grantor Trusts are better suited for large gifts, particularly if the donor lives in a high-tax state and wants to avoid state income tax. Non-Grantor Trusts are highly estate-tax efficient, and gifts to Non-Grantor Trusts are generally GST exempt, which means that Non-Grantor Trusts can make distributions to grandchildren or great-grandchildren without the distributions triggering any GST tax. Non-Grantor Trusts are well suited to receiving any type of asset — liquid or illiquid.

One interesting nuance is that Crummey Trusts, while typically structured as grantor trusts, can be converted into Non-Grantor Trusts. A non-grantor Crummey Trust will have many of the same qualities as a conventional Non-Grantor Trust, including the ability to avoid state income tax.

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 a Non-Grantor Trust, depending on circumstances. Those strategies are also worth exploring. Moreover, Crummey Trusts and Non-Grantor Trusts are not mutually exclusive; many people set up both.

Conclusion

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

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