Generally speaking, trusts are set up prior to a person’s death for two main reasons: first, to avoid probate costs, and second, to reduce 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 who establishes a trust for the purpose of giving away money, can place a maximum amount of $12,000 into the trust every year to avoid any “gift taxes.” However, there is one problem — in order for the money to be considered a “true gift”, it must fall under the full control of the beneficiaries. After all, have you truly received a gift if you cannot use it as you wish?
On the other hand, most people do not want to give away their money and control over that money to their young grandchildren or to others who may waste the money frivolously. A Crummey trust can solve this issue by allowing the grantor to retain control of the gift, meaning they can still designate how and when the money should be used. It should also be noted that a Crummey trust can be created for beneficiaries of any age, not just minors.
The key to how a Crummey trust works is that it allows the beneficiaries to gain complete control over the gift for a brief period of time (usually immediately following a deposit). So long as they are older than 18 years of age, the beneficiaries can withdraw the money during this time and purchase whatever they want. However, they will only have access to the most recent deposit, so the rest of the funds will remain secured in the trust if they have not been used yet.
How Does a Grantor Convince Beneficiaries Not to Spend the Money During That Brief Introductory Period?
Crummey trusts are typically used by parents to gift money to their children. One way to keep children from spending the money is by placing restrictions on the trust, such as not allowing them access until they reach a certain age or milestone (e.g., they get married, graduate from college, etc.).
Another way that a grantor can convince beneficiaries to not spend the money is to simply warn them that no other money will be provided if they decide to immediately access it and spend it all.
So long as this statement does not amount to some form of undue influence or economic coercion, then it will not render the gift invalid. Instead, it should 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 as much in a writing. Once the beneficiary has waived their use of the gift, its control will go back to the trustee, who will then determine what to do with the unused amount.
Although the trustee usually puts the gift back in the trust, it is not uncommon for a trustee to distribute the unused gift to other beneficiaries.
Are There Other Advantages to Using a Crummey Trust?
There are several other advantages to using a Crummey trust. For instance, unlike many types of trusts, the Crummey trust does not give its beneficiaries total access to the trust once they reach the age of majority (usually anywhere between 18 to 21 years of age, depending on the state).
Instead, with a Crummey trust, the beneficiaries will only have access to the annual amount that the grantor allocates to them; the rest of the trust will be locked away for future use.
In addition, a Crummey trust can be established for multiple beneficiaries. This can be very important and useful for families that have more than one child.
Are There Some Disadvantages to Using a Crummey Trust?
There are some disadvantages, however, to using a Crummey trust. For one, Crummey trusts come with high administrative costs. Also, it can be expensive to have the Crummey trust set-up since drafting the legal document to create one can be fairly tricky.
Nevertheless, the trust must be written properly to ensure that the IRS does not view the Crummey Trust as a different kind of trust; otherwise, a person might lose its benefits.
In addition, if the person who creates the trust also acts as its trustee, the trust will be counted as part of their estate taxes.
Do I Need to Hire an Attorney to Establish a Crummey Trust?
As discussed above, since it can be quite a challenge to draft a proper Crummey trust, it is often necessary to hire an experienced estate attorney in order to establish a valid one.
Additionally, having an attorney can also help ensure that the trust is executed and distributed correctly once it goes into effect.