The Crummey Trust: Still Relevant After All These Years

Traditionally, trusts used in estate planning contain “Crummey”
withdrawal powers to ensure that contributions qualify for the annual gift tax
exclusion. Today, the exclusion allows you to give up to $15,000 per year
($30,000 for married couples) to any number of recipients.

Now that the gift and estate tax exemption has reached an
inflation-adjusted $11.4 million, fewer people have to worry about gift and
estate taxes. But, for many affluent people, the annual exclusion continues to
be an important estate planning strategy. Thus, Crummey powers continue to be
relevant.

Reasons to make annual exclusion gifts

Despite the record-high exemption, there are two important
reasons to make annual exclusion gifts. First, if your wealth exceeds the
exemption amount, an annual gifting program can reduce or even eliminate your
liability for gift and estate taxes.

Second, even if your wealth is well within the exemption, annual
gifting guarantees that the amounts you give are permanently removed from your
taxable estate. If you rely on the exemption, keep in mind that there’s no
guarantee that Congress won’t reduce the amount in the future, exposing your
estate to tax liability.

Crummey powers explained

The annual exclusion is available only for gifts of “present
interests.” But a contribution to a trust is, by definition, a gift of a future interest. To get
around this obstacle, trusts typically provide beneficiaries with Crummey
withdrawal powers. By giving them the right to withdraw trust contributions for
a limited period of time (usually 30 to 60 days), it’s possible to convert a
future interest into a present interest, even if the withdrawal rights are
never exercised.

For Crummey powers to work, the trust must give beneficiaries real withdrawal rights.
Generally, that means you can’t have an agreement with your beneficiaries —
expressed or implied — that they won’t exercise their withdrawal rights
(although it’s permissible to discuss with them the advantages of keeping
assets in the trust).

It also means that the trust should contain sufficient liquid
assets so that beneficiaries can exercise their withdrawal rights if they
choose to.

Notifying beneficiaries of withdrawal rights
is critical

The IRS has long taken the position that a trust contribution
isn’t a present-interest gift — and, therefore, is ineligible for the annual
exclusion — unless beneficiaries receive actual notice of their withdrawal
rights and a “reasonable opportunity” to exercise those rights. To avoid an IRS
challenge, it’s prudent to provide beneficiaries with written notice of their
withdrawal rights, preferably via certified mail.

There’s no specific requirement regarding the amount of time
that constitutes a “reasonable opportunity.” The IRS has indicated in private
rulings, however, that 30 days is sufficient, while three days isn’t. Common
practice is to give beneficiaries between 30 and 60 days to exercise their
withdrawal rights.

If you wish to make annual exclusion gifts to a trust, be sure
the trust provides the beneficiaries with Crummey withdrawal powers. Contact us
with questions.

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