What is a Crummey trust?
A Crummey trust enables a person to give away assets incrementally to avoid two types of taxes — estate taxes and gift taxes.
The federal estate tax exclusion for a person who dies in 2013 is $5.25 million. This means the first $5.25 million of your net estate is exempt for federal estate tax purposes. The net value of your estate is the value of your assets minus your debts.
People with sizeable estates who want to avoid estate taxes can do so by reducing their assets to less than the exclusion amount. Most people want to give their assets to their children when they die, so why not give a significant chunk of your assets to the children before you die to avoid estate taxes?
One problem with doing that is gifts in excess of a certain amount are subject to gift taxes. The Federal Gift Tax exemption is $14,000 in 2013. This means you can give another person up to $14,000 this year without incurring federal gift taxes. (Qualified medical and educational expenses are also exempt from gift taxes.)
If you have no qualms handing over your assets incrementally without exceeding the annual gift tax exemption, then you can avoid estate taxes and gift taxes. But, family dynamics change and children – including some adult children – lack the capacity or maturity to properly manage significant assets.
One solution is to establish a Crummey trust. Crummey trusts are named for the first individual who won his case against the IRS when the IRS attempted to tax the assets in the trust. A Crummey Trust can be funded incrementally at an amount that does not exceed the yearly gift tax exemption. The child need not have any rights to the trust assets' income.
The key that makes a Crummey Trust exempt from gift or estate taxes is that the trust beneficiary must have the right to withdraw each gift within 30 days after the gift is made to meet the IRS's requirement that a beneficiary must have a present interest in the gift for the gift to be non-taxable.
If the child does not withdraw the gift within the 30 days, the withdrawal right lapses and the money remains in the trust until the child reaches the distribution age you designated.
If the child does withdraw the gift, then you can cease making gifts to that child's trust. The assets already in the trust would eventually be distributed according to the terms you designated.
In a later article, we will discuss how a Crummey trust can be used to shelter life insurance proceeds from estate taxes and inheritance taxes.
For more information about a Crummey trust or any other estate planning need, call an experienced will and trusts lawyer at the Peterson Law Group. Our experienced Conroe, Texas attorneys help clients develop comprehensive estate plans. Call us at 936-337-4681 or 979-703-7014 or contact us online to arrange an appointment.