What is a Crummey transfer?

When it comes to handling your financial assets and transferring them to beneficiaries, often your children, a spouse, or long-term domestic partner, you have some choices to make for managing the distribution of these funds. Various types of trusts help you plan for the future of your loved ones, even after you’re gone. If you choose to place financial gifts in a trust, you’ll want to know how to minimize or eliminate taxes on them so your family benefits more from your estate than the IRS. This is where a Crummey trust can come in handy.

What Is a Crummey Trust?

A Crummey trust is specifically designed to transfer assets, usually to minor or adult children, though anyone can be a beneficiary. The purpose of a Crummey trust is to avoid gift taxes on the bequeathed assets.

How Does a Crummey Trust Work?

A Crummey trust works differently than other types of trusts in terms of taxation. This type of trust also differs in the transfer of assets and withdrawals of funds for beneficiaries. At the onset of creating a Crummey trust, a set window of time is established, specifying how long the beneficiary has to withdraw any assets. In some cases, a beneficiary may withdraw assets within the first month after the trust is created and funded.

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This short window of withdrawal power allows them to present interest in the monetary gifts included in the trust. This is the most valuable feature of a Crummey trust, as it’s the aspect that allows you to reduce gift taxes or eliminate them when transferring financial assets to a minor child, adult child, or any other beneficiary you choose to include in the Crummey trust.

Technically, a beneficiary could withdraw funds from the trust during the initial window of time set, but that would be unlikely in the case of a minor child. If no assets are withdrawn during the period you set for the window, any monetary gifts you’ve put into the trust will remain there until a later date. According to the terms and timeline you set within the trust, the beneficiary will withdraw them in the future. It’s the responsibility of the trustee to adhere to the terms of the trust you established at its creation.

What Are the Advantages of a Crummey Trust to Estate Planning?

The primary advantage of including a Crummey trust in your estate planning is the benefit of how tax laws handle financial gifts in a Crummey trust. If your beneficiary refrains from withdrawing any funds from the trust during the initial withdrawal period set, funds added to the trust for them will then be exempt from taxes due to an annual gift tax exclusion.

The gift tax exclusion is limited to $15,000 per tax-paying individual. If you’re a couple who files a joint tax return, you’d be permitted to gift a combined $30,000 per child, on an annual basis, without it being included in a gift tax. However, you could still be required to file a gift tax return when preparing your taxes.

To make the gift tax exclusion rule work, you’ll need to make sure that your Crummey trust has a legitimate withdrawal period, during which your beneficiary will be allowed to withdraw funds from the trust. Withdrawals probably won’t be an issue with minor children, as you will likely set up the trust on their behalf.

In the case of adult children or other adult beneficiaries, you can specify that no other financial gifts will be added to the trust if any assets are taken out of the trust during the set withdrawal period. This can serve as an incentive to prevent beneficiaries from seeking to withdraw trust assets too soon.

While Crummey trusts are often used primarily for the transfer of wealth, they can also be helpful in college fund planning. For example, you could earmark funds in the trust to be used for college tuition only. Or you could set other conditions, such as your child having to turn a certain age or complete college before being permitted access to the trust. The advantages to Crummey trusts are that they provide you with precise control of trust assets and a timeline for distribution to your beneficiaries while also providing tax benefits.

What Are Crummey Powers?

Under the tax laws governing Crummey trusts, the gift tax exclusion applies to gifts given up to $15,000 per year per person. There’s one loophole, though, that may allow gifts in excess of $15,000 a year without triggering any gift tax under an addition to the annual gift tax exclusion. There’s a federal estate tax lifetime exclusion as well, which allows up to $11.7 million per person. Therefore, if you decide to put annual gifts in excess of $15,000, you’re permitted to deduct them from your lifetime exclusion.

Should You Create a Crummey Trust?

Crummey Trusts aren’t suitable for everyone. For example, most people cannot annually gift beneficiaries large sums of money via a trust. However, a Crummey trust might be a good choice for you if you’ve been fortunate enough to have amassed substantial wealth over the years and are looking for a financial vehicle to hold annual gifts to your beneficiaries in a trust.

Another reason you may want to create a Crummey trust reduces the size of your estate so that you can minimize the amount of estate taxes your estate would be forced to pay at the time of your passing. This means your beneficiaries, often your closest family members, will be able to keep more of the money you worked so hard for to help them have a bright future.

If you’re near the Lake Forest, Illinois area, and need more information about Crummey trusts, planning a college fund, other forms of financial planning, and wealth management, please feel free to reach out to the accounting and consulting professionals at Pasquesi Sheppard. We’re experienced in all matters involving taxes, auditing, bookkeeping, and an array of other financial services. You can call (847) 234-5000 or fill out a contact form on our website Financial Planning & Consulting in Lake Forest to set up a consultation to discuss your financial goals and help you plan for the future.

A couple signs a Crummey trust

Establishing a trust may be on your estate planning to-do list if you want to preserve your wealth for future generations while potentially enjoying some tax advantages. A Crummey trust is a specific type of trust that can be used to transfer assets to minor children or to anyone else when your intention is avoiding gift taxes. This type of trust may be less commonly used than other trusts, but understanding how it works can help you determine whether you should be using one. To get hands-on guidance in deciding whether a Crummey trust is for you, consider enlisting the help of an expert financial advisor.

Crummey Trust, Definition

A Crummey trust, named after Clifford Crummey who first came up with the idea for this type of trust, is designed for making financial gifts to beneficiaries while minimizing gift tax. This type of trust is typically used by parents who want to make financial gifts to minor or adult children, though anyone can establish one on behalf of a beneficiary.

Crummey trusts can offer an alternative way to gift money to minors in lieu of custodial accounts, in which an adult controls assets until the child reaches the age of majority. Unlike a custodial account, which automatically grants ownership of assets to children once they reach legal age, a Crummey trust can offer more flexibility and control over when beneficiaries are allowed to tap into assets.

How a Crummey Trust Works

Crummey trusts are a little different from other types of trusts in terms of taxation and the transfer of assets to trust beneficiaries. When you set up this type of trust, the beneficiary has a set window of time in which they can withdraw assets. For example, they may be able to do so within the first 30 days after the trust is created and funded.

This withdrawal power gives them a present interest in the financial gifts included in the trust. This feature is what allows you to minimize gift taxes or avoid them entirely when giving money to minor children or any other beneficiary.

While the beneficiary could technically withdraw assets from the trust during this window, that would be unlikely in the case of a minor child. Assuming no assets are withdrawn during this period, any financial gifts you’ve made would then stay in the trust to be distributed to the beneficiary or beneficiaries according to the terms and timeline you’ve set. It’s up to the trustee to ensure that the terms of the trust you’ve outlined are followed.

Advantages of Crummey Trusts for Estate Planning

"GIFT TAX" written on a piece of paper

The chief advantage of including a Crummey trust in your estate plan is its favorable treatment of financial gifts for tax purposes. Assuming that your beneficiary doesn’t withdraw funds from the trust during the withdrawal period, money added to the trust on their behalf would then qualify for the annual gift tax exclusion.

As of 2020, the annual gift tax exclusion limit is $15,000 per person, per taxpayer. So that means if you’re a married couple filing a joint return, you could technically gift $30,000 per child, per year, without triggering the gift tax. Though, you may still need to file a gift tax return when you prepare your taxes.

The key to making this rule work for you is ensuring that your Crummey trust includes a legitimate withdrawal period in which your beneficiary can exercise his right to take money from the trust. In the case of minor children, withdrawals likely aren’t an issue if you’ve set the trust up for your kids.

With adult beneficiaries, it’s not uncommon to specify that if assets are taken from the trust during this withdrawal period then no further financial gifts will be made. That can be an incentive to keep beneficiaries from taking out trust assets too soon.

Crummey trusts can be used for transferring wealth, and they’re also useful for college planning. For example, you could specify that the money in the trust should be used to pay for college. Or you could specify that your child can’t access the money until they’ve completed college or reached a certain age.

In a nutshell, Crummey trusts can give you control of trust assets and when they’re distributed to your beneficiaries, while also yielding tax benefits. Both can be helpful if you’re looking for another option beyond custodial accounts or 529 college savings accounts to plan for your child’s financial future.

Are There Any Downsides to Crummey Trusts?

If you’re thinking that a Crummey trust could be a useful addition to your estate plan, there are a few potential drawbacks to keep in mind.

First, there’s the cost of setting up and maintaining a Crummey trust. You’ll typically need to pay an attorney to help with creating the trust and the trustee can also collect a fee. The exception would be if you’re acting as the trustee yourself.

That, however, means the trust can be included in your gross taxable estate. For that reason, it may be better to appoint a disinterested third-party to act as a trustee to minimize your own tax liability.

And finally, there’s always the possibility that your trust beneficiary will withdraw money from the trust during the withdrawal window. That would negate any gift tax exclusion benefits you might have enjoyed by leaving the money in the trust.

Since these trusts can be a little more complicated than other types of trusts, it may be helpful to talk through the details with an estate planning attorney. An estate planning attorney can help you determine whether a Crummey trust could work in your favor and if so, what terms to set when creating the trust to make the most of any assets you’re gifting to beneficiaries.

The Bottom Line

Three generations of a family on a hike

Crummey trusts are just one way to manage the transfer of wealth to future generations. These trusts can offer some tax benefits and if you’re creating one on behalf of minor children, they let you have a greater say in when assets can be accessed compared to a custodial account. Assessing your bigger estate planning and tax planning picture can help you decide where you should be using a Crummey trust to further your financial goals. As with any other type of trust, it’s important to consider the costs of setting up and maintaining the trust over time.

Tips for Investing

• Consider talking to a financial advisor about the pros and cons of Crummey trusts and trusts in general. If you don’t have an advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area. If you’re ready, get started now.

• In addition to a trust, you should also include other financial tools for your estate plan, such as a last will and testament or advance health care directive. Life insurance and long-term care insurance may also be something you need if you want to preserve assets for your loved ones. Together, these tools can help with shaping a comprehensive plan for managing wealth during your lifetime and after you’re gone.

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