Nothing Crummy About “Crummey” Trusts

In a recent article in the Wall Street Journal titled: A Ruling Eases Tax-Free Gifts, Laura Saunders points out a recent U.S. Tax Court ruling which affirmed allowing a couple the use of Crummey trusts to make tax-free transfers of $1.6 million without using any of their lifetime gift-tax exemptions.

A Crummey trust works by allowing people who want to put assets in trusts for heirs, including minors like grandchildren, a way to do it using their annual exclusions. These exclusions currently allow each person to give $14,000 per year to as many people as they would like without dipping into their life-time exemption (currently $5.43 million) or triggering gift tax.

For example, a couple with two married children and four grandchildren could shield $224,000 from tax to make gifts to Crummey trusts for the children, children’s spouses and grandchildren (two times eight exemptions at $14,000 per exemption). If the couple made gifts in December of 2014 and January of 2015, two different tax years, they could shield almost $450,000 from taxes in very little time.

There is an important thing to remember with Crummey trusts. To satisfy the legal requirements, the heirs (or their guardians) must have the right to withdraw funds for a certain period each year, usually 30 or 60 days. But most heirs do not take money out because most know that their parents or grandparents will not make future gifts if they do.

Consult your estate planning attorney for further information.