A Crummey trust is a vehicle that allows parents to take advantage of tax planning through the use of the annual exclusion gift while also not handing over large amounts of money to their minor children. The annual exclusion gift currently allows a person to make gifts of $13,000 each year to as many people as he or she would like. No tax is due on this amount and a gift tax return does not have to be filed, although if a married couple wants to gift-split, they will have to file a gift tax return to elect gift-splitting. A requirement for obtaining the annual exclusion status is that the gift must be a present interest, which means the recipient of the gift must have the unrestricted right to the immediate use, possession, or enjoyment of the property or the income from the property. The present interest requirement presents the problem of wanting to take advantage of the annual exclusion gift to one’s children each year, but not wanting to hand over up to $13,000 annually to a minor. The Crummey trust solves the problem by satisfying the present interest requirement for the annual exclusion gift. It satisfies the present interest requirement by creating a right to demand payment in the beneficiary. The demand right satisfies the present interest requirement because the beneficiary has the immediate right to the contributions, and it is up to the beneficiary as to whether he or she wants to demand payment.
In order to receive the desired tax effects of a Crummey trust, several requirements must be met. First, the beneficiary of the trust must receive actual notice of contributions to the trust and the right to withdraw contributions. This requirement is satisfied by having the trustee send out a letter to the beneficiary giving him or her notice of the contribution and the right to withdraw each time a contribution is made to the trust. Second, the beneficiary must have a reasonable period of time to exercise the withdrawal right. Thirty days is considered a reasonable period of time. Third, the trust must have sufficient liquid assets to satisfy any demand made pursuant to the beneficiary’s right to demand. This means the trust should not be funded with assets that are illiquid or assets that the donor does not want to be sold to satisfy a demand. Lastly, the donor cannot enter into an agreement with the beneficiary that he or she will not exercise the demand right.
This is just a brief overview of the need that the Crummey trust fills and the requirements that need to be satisfied to get the desired tax effects. Many other considerations need to be discussed before a Crummey trust is set up, such as who will be the trustee, whether a guardian should be appointed for the minor child to receive the notice from the trustee, and whether the donor trusts the beneficiary to not exercise the demand right. A Crummey trust is not for everyone, but parents or grandparents may want to consider it if they have some of these factors: 1) they want to gift large amounts of money to their children or grandchildren, 2) they have a large estate and want to reduce their estate tax, 3) they have maxed out their other college savings options and want to save more, 4) they do not trust their children or grandchildren to manage the money as young adults, and 5) they would like their children’s or grandchildren’s college fund to own alternative investments.