Crummey Trusts

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What Is a Crummey Trust?

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. It should be noted that a Crummey Trust can be created for beneficiaries of any age, not just minors.

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 withdraw the money and, for example, buy a $12,000 motorcycle.

How 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.

What If the Beneficiaries Choose Not To Use An Annual Gift?

If a beneficiary declines to use an annual gift, the beneficiary must state so in writing. Once the beneficiary has waived his or her use of the gift, control goes back to the trustee, who determines what to do with the unused amount. The trustee usually puts the gift back in the trust, although it’s not uncommon for a trustee to distribute the unused gift to other beneficiaries. 

Are There Any Other Advantages to Using a Crummey Trust?

Yes. Unlike other trusts, beneficiaries have no right to total access of the crummey trust when they reach the age of majority, eighteen or twenty-one depending on the state. The beneficiaries can only access the annual amount allocated; the rest of the trust is locked away for the future.

In addition, the trust can be established for multiple beneficiaries. This can be very important for families with more than one child.

Are There Any Disadvantages To Using a Crummey Trust?

A Crummey Trust can have high setup and administrative costs since writing a proper Crummey Trust can be quite tricky. The trust must be written correctly to ensure the IRS doesn’t view the Crummey Trust as another type of trust. If the person creating the trust acts as the trustee, the trust will be counted in the person’s estate taxes.

Do I Need An Attorney To Establish A Crummey Trust?

Since Crummey Trusts are difficult to draft correctly, having an experienced estate attorney is often necessary when establishing a Crummey Trust. The attorney can also ensure that the trust is executed properly when the trust goes into effect.

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Last Modified: 07-30-2012 11:16 AM PDT

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