Many parents and grandparents want to pass their wealth to their children and grandchildren while they are still alive. Lifetime gifts to children or grandchildren can be a good way to reduce a taxable estate. While you can give a child or grandchild $16,000 (in 2022) a year as an annual exclusion gift, you probably don’t want a child or grandchild who is a minor or very young adult to receive the money outright. A “Crummey” trust provides a way to take advantage of the gift tax exclusion while keeping the money in trust until a child or grandchild is old enough to handle it.
You may have heard of “custodial accounts” for children, where the parent or someone else retains custody of the child’s account. The downside of these accounts is that the child has the right to the money when he or she reaches the age of majority (18 or 21, depending on how the account was set up). You may not want an 18 or 21 year-old to receive a large sum of money.
The benefit of putting money into a trust rather than a custodial account is that you can decide when the money will be given to the beneficiary and how much the beneficiary will receive. But putting money into a regular trust presents one big problem: In order for the gift to avoid being a taxable gift, the beneficiary must have a “present interest” in the money. Because a promise to give someone money later does not count as a present interest, most gifts to trusts aren’t excluded from being considered a taxable gift.
The Crummey trust (named for the court case that approved this type of trust) is designed to allow you to pass wealth using a trust while receiving a gift tax exclusion. The trust includes a provision that gives the beneficiary a temporary right to withdraw money from the trust. After a certain amount of time has passed (usually 30 days), the beneficiary can no longer withdraw the money and it becomes a part of the trust. It is very important that you notify the beneficiary of the gift and his or her right to withdraw the gift or the IRS will not apply the gift tax exclusion. There is the risk that the beneficiary will withdraw the money right away, but you can make it clear (but not in writing) that any withdrawals will mean that he or she will not get any more gifts from you. Once the money is in the trust, the trustee controls how much the beneficiary can receive and when.
Before setting up a trust to pass wealth, be sure to talk to the attorneys at Kurre Schneps LLP about what is most appropriate for your situation.
