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Crummey Trusts
Trusts are set up before a person’s death for two main reasons: to avoid probate costs and estate taxes. Since grantors have already “given” assets to beneficiaries through the trust, there is no need for the state court process of probate. Furthermore, an irrevocable trust avoids estate tax since the beneficiaries are the true owners of the money and pay taxes on the trust’s interest.
A person establishing a trust to give away money can place a maximum of $12,000 into the trust every year to avoid any “gift taxes.” However, there is one problem – the money, to be considered a “true gift,” must be under the full control of beneficiaries. After all, have you really received a gift if you cannot use it as you please?
However, many people do not want to give away money and control over that money to their young grandchildren, for example, who would waste the money frivolously. The Crummey trust solves this problem by letting the grantor keep control of the gift, designating how and when it should be used.
The trick to a Crummey trust is allowing beneficiaries complete control over the gift for a brief period of time immediately following deposit. Beneficiaries can withdrawal the money and, for example, buy a $12,000 motorcycle.
How, then, does a grantor convince beneficiaries not to spend the money during that brief introductory period? The grantor can simply warn beneficiaries that no more money will be forthcoming if they immediately go out and blow it. As long as this statement does not amount to economic coercion or undue influence, it will not render the gift invalid, and will enable the Crummey trust to do its job of avoiding estate taxes through the $12,000 gift tax exclusion.
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