What is a Crummey Trust?
Within the realm of estate planning products, there are many different types and subcategories of trusts that you can use to best take care of your family and friends. One such type of trust is the “Crummey trust”, which is used specifically to take advantage of the option for gift tax exclusion when transferring your assets to another person. Specifically, a Crummey trust allows parents to make lifetime gifts to their children up to $13,000 per year without any gift or estate taxes. The child does not have access to the fund until they reach an age designated by the family, but they can continue to place gifts of up to $13,000 per year in the trust for the child to use throughout their lifetime.
Clifford Crummey was the first person to use this type of trust, and so it is named after him. The IRS initially tried to tax the gifts, but courts ruled in their favor. Families now continue to use this type of trust to leave money for their children. In order for the Crummey trust to work, the child must have what is called a ‘present interest’ in the gift. This means that technically, the child should be able to spend the money immediately. With these stipulations, after a gift is placed into the trust, the recipient has access to it for 30 days before it falls under the rules specified by the trust (ie., the child cannot touch the money until they reach a certain age).
There are many benefits to using a Crummey trust to provide money for your children. Of course, you can easily use it to avoid gift taxes, therefore keeping more of your money in the family. It also is a good way to give money to your children while you are still alive, as opposed to leaving it in a will. Additionally, you can specify what the trustee can use it for – many people choose to leave money to their children specifically for education and healthcare needs.
You can use a Crummey trust to transfer a variety of things to your children. In addition to using it to give them money, you can also register investments in their name, or even leave them real estate titles. You can put things in the trust for your child to access in the future, but they won’t get the gift tax exemption unless the child can access it right away. Generally, most children know that it is not in their best interest to try and use the gift in that initial 30-day period without parental permission. However, it is important to keep in mind that technically, your child can do what he wants with the money during this time, and so if you do not trust your child, this may not be the best option for you.
This estate planning strategy has been around for a very long time, and it is a very easy way to transfer money to your children. To set one up, talk to a lawyer or financial planner who specializes in estate planning. There are a variety of regulations put forth by the IRS regarding these trusts, so having the help of an expert ensures that all of your gifts are legal. Your beneficiaries are also required to receive a legal notice of all gifts to the trust, and need to be given proper instructions for how to access the money as well. With this in mind, consider working with a legal trust specialist to help provide your child with the funds they need to succeed.
