Deriving its name from a taxpayer that succeeded in getting an annual exclusion when setting up a trust for his children, a Crummey trust can help shield money from gift and estate taxes if it is properly set up and administered.
Here is an example of how a Crummey trust works: Your estate planner will help you set up a trust that purchases a life insurance policy on your life. The insurance premiums will be funded by gifts that you place into the trust. Each year you are entitled to give as much as $14,000 per family member named in the trust. Because the trust owns the life insurance policy, the death benefits will eventually go to the trust and then get distributed to the trust’s beneficiaries, avoiding gift and estate taxes.
The only catch is administrative in nature. To receive the benefits of a Crummey trust, each year, the trustee must send out “Crummey letters” informing beneficiaries that they are entitled to withdraw the gifted amount for a certain period of time. This is because the IRS only considers a gift to be tax-free if the recipient has the right to take it. However, it is usually understood that Crummey rights will not be exercised. Therefore, the gift should remain in the trust until the time period to exercise the withdrawal right expires, when the funds can be used to pay premiums.
While a fairly recent case came down in favor of an estate that neglected to send out annual Crummey letters, it is always safest to use them. For a Crummey trust to work, these letters should be sent out and acknowledged by each beneficiary of the trust, and a record should be kept of this correspondence. This will ensure that there are no issues when the life insurance policy pays the trust, and the trust, in turn, distributes the funds to beneficiaries.
The Law Office of Jane Frankel Sims assists its clients in preparing, mailing and maintaining records of Crummey letters. If you have questions regarding a new or existing Crummey trust, please contact us at (410) 828-7775.