Summary: In 2014, a trust utilizing Crummey powers allows an individual to contribute $14,000 a year ($28,000 for married couples) into a trust without diminishing the lifetime gift tax exemption. Instead, the gift is exempt from the gift tax under the Annual Gift Tax Exclusion. These gifts can help avoid the 40% Federal Gift Tax, preserving wealth for the family.
Typical Uses: Crummey powers are typically used in Irrevocable Life Insurance Trusts and in Gift Trusts. Crummey powers are a valuable tool whenever someone wishes to make gifts to an Irrevocable Trust, but not use up the Federal Gift Tax Exemption.
How it works: The Federal Gift Tax does not apply to Annual Exclusion Gifts. The Annual Exclusion states that any person can annually make a gift to another person free of gift tax. In 2014 this gift can be up to $14,000, and this amount is adjusted for inflation each year. In short, this $14,000.00 is considered to small to keep track of for the Federal Gift Tax. But, to qualify, the gift needs to be given directly to the person creating a “present interest”.
The statute is designed to exclude any gifts being made to a trust, as those are “future” interests to the beneficiary. Crummey powers are the result of clever lawyering, and they create a “present” interest even though the gift is made to an irrevocable trust. The IRS is not pleased with the result, but the Supreme Court ruled against the IRS’ protests.
Creating a Present Interest: In order to qualify as an Annual Exclusion, the gift recipient must have a present interest in the gift. When a trust uses Crummey powers, those Crummey Powers allow the beneficiary to withdrawal the gift with no strings attached for a period of time; similar to any other gift.The IRS accepts a period of 30 days after receiving notice of the gift to establish authentic Crummey Powers. To satisfy the rules created by the Supreme Court, the trust must require the trustee to notify the beneficiaries of their right to claim the gift.
The opportunity to withdrawal the gift outside of the trust during the 30 days is sufficient to create a present interest in the gift. This is true whether or not the withdrawal rights are exercised. Therefore, after 30 days if the withdrawal rights are not exercised, the gift lapses into the trust and the trustee may use these gifts in accordance with the terms of the trust document.
Typically, once the gift lapses into the trust, the withdrawal rights terminate. The trustee is then free to use the funds to pay for life insurance or to accumulate the funds to benefit the beneficiary in the future.
Typically, the expectation of future annual gifts under the same mechanism, or other expectations, motivates the beneficiary of the gift not exercise the right of withdrawal and allow the funds to lapse into the trust.
As a team, a married couple may transfer $28,000 per year ($14,000 each parent), per child, into trust tax free without counting against their 5 million dollar lifetime estate tax exemption. If this is done annually over a long period of time, the Crummey trust can remove a substantial amount of money from the parent’s taxable estate and free of the parents’ creditors.
Example without Crummey Trust (10 years)
Family Assets: $11,120,000
The parents’ both die able to shelter $10,000,000 from the Federal Estate Tax, but pay a $448,000.00 Federal Estate Tax (40% tax on $1,120,000).
Example with Crummey Trust (10 years)
Family Assets: $11,120,000
Year 1-10 transfers into Crummey trust: (4 x 28,000 x 10 years) = 1,120,000
Result: $ 10,000,000 protected by the Federal Estate Tax and $1,120,000 which passes tax free in the Crummey trust. Tax savings: $448,000.00.
If you have questions about Crummey Powers or Crummey Trusts, feel free to contact our office for a free consultation. Wills, Trusts and Estates, It’s All We Do!
Peter Klenk, Esq.
Adam Reid, Esq.