Ah, the reliable Crummey trusts. These golden estate planning options aren’t taken advantage of as often as they might should. They’re ideal estate planning options that are used to serve a number of purposes. It allows you to take advantage of the gift tax exclusion, serves as a perfect savings vehicle for your loved ones – including the option of lifetime gifts and it can protect against those pesky estate taxes. So if it serves all of these purposes, why isn’t it used more?
The answer is many simply don’t understand the versatility nor the many advantages. This week, we take a look at Crummey trusts and a few of those many advantages.
The Crummey Trust History
Clifford Crummey first successfully used this technique, hence, the Crummey trust name. He wanted to provide gifts to his kids, but the IRS had a problem with the annual gift tax exclusion. It said the absence of a “present interest” made the effort moot. Not one to be outsmarted, Crummey took the next step. When he did, the courts had no reason to not allow him to move forward.
What Crummey Trusts Do
Crummey trusts are designed to help parents with considerable wealth leave to their children assets minus the excessive tax burden. A Crummey trust allows a parent to make lifetime gifts to each child with no worries of gift taxes or estate taxes, provided you stay within the permitted amounts. The funds grow every time you make those gifts to the accounts.
Ah, but there’s one very important rule that if not followed, could result in more than a few problems – both for you and your kids.
The One Rule That Protects it All
There’s the matter of the “present interest”. What this means is the gifts you’re providing to your children must include a present interest that allows them to withdraw the money. Doesn’t matter if they’re 5 or 15. Of course, that’s probably the last thing you want to do. No one says to their kids, “Hey, you have thousands of dollars to spend”, but that’s exactly what you have to do. The good news is you can limit that access to just 30 days, at which time, the money moves to a trust and has specific rules for withdrawals. These rules are ones you put into place.
So how do you keep your kids from letting this money burn a hole in their pockets? Most parents put in writing the 30 day window in which the kids can withdraw the funds. This is done to satisfy IRS requirements. While you technically have to let the beneficiary know there’s money available, once that window closes, it’s closed until the other requirements are met, such as “you can access the money at the age of 21” or after college or when they marry – any reasonable conditions you wish to place on the funds are typically fine. Even if your teenager does pull a fast one, he can only access the most recent gift.
Of course, there’s much more that goes into the Crummey trust. If you’d like to learn more about these estate planning techniques, we invite you to call our team of Vermont estate planning lawyers.
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