Many hard-working individuals naturally want to pass on their assets to their family -- the people they care about the most. In this post, we will discuss the Crummey Trust and how this trust can play an essential role in a comprehensive estate planning strategy, as well as some of the challenges presented to this type of trust by interested external parties.
The Crummey Trust Explained
A Crummey Trust is typically used by parents who want to extend gifts to their children without the IRS imposing any gift tax penalty upon either the grantor or the gift recipient. For the tax year 2018, the maximum gift amount was $15,000 per recipient. For the tax exclusion to apply, the following stipulations must be met:
- the beneficiary must have a "present interest" in the gift,
- those 18 and over must be granted immediate access to withdrawal of the gift,
- the withdrawal typically must be made within 30 to 60 days,
- any monies left after the withdrawal period are subject to withdrawal rules set by the trust grantor.
In some cases, a parent may create this type of trust and regularly gift to their minor children. These minor children are not allowed to withdraw from the trust, thereby allowing the trust to continue to build in value. The trust grantor (parent) will typically set up withdrawal rules during the creation of the trust in order to stipulate at what age, 18 and beyond, their child can begin to make actual gift withdrawals from the trust.
Challenges to the Crummey Trust
In a recent court case, Mikel v. Commissioner, the IRS tried to make the argument that an in terrorem clause in a Crummey Trust per se shows that withdrawal rights are illusory. Fortunately the taxpayer won the case, thus protecting their trust from the reaches of the IRS and any other potential creditors. If you would like to know more about setting up a Crummey Trust for your beneficiaries, please contact us! We can help with all your estate planning needs including living wills, granting power of attorney, charitable trusts, advance directives and more.
