As you can see, the name of this blog is “Crummey Estate Plan.” If you’re not an estate planning attorney, CPA or financial advisor, or even if you are, you may be a bit confused as to why I would pick such a name. Well, it was my attempt at trying to be funny. And, the fact that I now have to explain the “play on words” makes the already not-so-funny name, not funny and most likely pretty lame. However, my hope is that if you don’t get it, this article will educate you enough so that one day in the future you will look back at the name of this blog and at least give it a “ha, ha, that is pretty clever” – I can dream, right?
First and foremost, I can spell. I know that “Crummey” in the traditional sense of the word is spelled “crummy.” In this blog, it is spelled “Crummey” after an important gift tax and estate planning case, Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968); but, more on that later. The main purpose of this blog is to provide estate planning attorneys, CPAs, financial advisors and anyone else interested in estate planning with foundational concepts, advantages & disadvantages, tips and new developments on different estate planning techniques. By doing so, my hope is that there will be less “crummy” estate planning going on.
But, naming a blog “Crummy Estate Plan” would be no fun. That is why, as you will find out below, naming my blog “Crummey Estate Plan” was genius (well, maybe not genius, but clever?). The name creates a “play on words” while also introducing an important estate planning technique that uses what are called “Crummey Trusts.”
Let’s first set up a typical situation where a Crummy Trust may be advantageous. The individual is already or plans on making annual gifts to their children, grandchildren, or other loved ones. Here, let’s say the grandmother wants to make annual gifts to her grandchildren. There could be a variety of reasons for this – it’s a way to decrease the size of her estate, to transfer wealth to her family members, etc. Multiple posts could be written on the different reasons why making annual gifts during your lifetime may be an extremely important and beneficial estate planning technique but let’s keep this simple and save that for later blog posts. For purposes of this post, let’s just say that the grandmother is making annual gifts to her grandchildren and not worry about why.
Like in most scenarios, the grandmother may not want to make the gifts outright to her grandchildren. Again, this could be for a number of reasons – impending divorce or bankruptcy, they are too young to be responsible with the money, the grandmother wants them to save it, etc. One a way to protect this gift is to put it in a trust for the benefit of her grandchildren. This will provide the protection the grandmother wants. Easy enough, right?
Wait, not so fast. In order for the gift to qualify and be used to offset the grandmother’s annual gift exclusion amount and not her lifetime exemption amount, the gift has to be a present gift and not a future gift. In 2014, the annual gift exclusion amount is $14,000. This means that a taxpayer may give up to a $14,000 gift to any and all persons in 2014 with no resulting tax effects or consequences. The reason why the grandmother will want to use the annual gift exclusion amount instead of her lifetime exemption amount is so that she can save that lifetime exemption amount for future estate planning (again, let’s save this for another post).
If the grandmother puts the gift in an everyday ordinary trust for her grandchildren that does not allow them to access it until they are age 25, then that is not a present gift, that is a future gift. In order for the gift to be a present gift and be offset by the annual gift exclusion, the grandchildren have to have the right to access it on the day of the gift. You are probably thinking, well if the trust allows for that, that will defeat the grandmother’s whole purpose of setting up the trust to protect the gift and she might as well just give them the gift outright. Well, herein lays the importance of a Crummey Trust.
The Crummey Trust allows the grandmother to make gifts to a trust in an amount up to the annual gift exclusion amount, while also protecting the gift and providing instruction and guidance as to how it should be used by or for her grandchildren in the future. The court in Crummey v. Commissioner confirmed that such a trust allows the taxpayer to use its annual gift exclusion to fund the trust with gifts while also transferring the amount of the gifts out of their estate (which can be very important and beneficial for wealthy taxpayers who may be subject to estate taxes when they pass away).
Perfect! Now, how does one create such a trust? Well, you need to consult an experienced estate planning attorney who has experience drafting Crummey Trusts to make sure it is set up and administered correctly. If done incorrectly, the tax consequences could be devastating and the gifting to the trust may not achieve what you had intended (i.e., to protect the gift and provide instruction and guidance as to its future use).
The basic idea is this though: The trust document must give the beneficiary (or, here, the grandmother’s grandchildren) the power to demand immediate possession and enjoyment of the gift. This satisfies the “present gift” requirement so that the grandmother can use her annual gift exclusion amount to offset the gift and the gift will no longer be a part of her estate. However, the grandchildren’s power to demand immediate possession and enjoyment of the gift is not unlimited. While the trustee must give each grandchild an annual written notice of their right to withdraw from the trust (typically called “Crummey Letters”), the period of time in which the grandchild may withdraw such gift is limited. The period of time is typically 30 days.
If the grandchildren decide not to exercise their right to immediate possession and withdraw the gift, then the gift will become part of the trust’s principal and be subject to the trust’s distribution limitations (such limitations could include that the trust assets can only to be used for support, health and education of the grandchildren or that a grandchild does not receive their share of the trust until they turn age 25, etc.). Typically, a beneficiary will not exercise their right to immediate possession; therefore, all of the grandmother’s intentions will be carried out – the gift qualifies for the annual exclusion, is excluded from her estate and is held in trust, which provides protection of the gift and controls the ultimate distribution of the gift.
Some of us may not understand why the grandchildren would not exercise their right to immediate possession of the gift, I mean who wouldn’t? Just a thought, but it is probably because they fear (or know) that if they do, they will jeopardize any future gifts that their grandmother may have planned to make to them in the future (i.e., grandmother will stop making the gifts). And, even if certain grandchildren were to exercise that right in a particular year, they only have access to the amount of that year’s gift, not to any previous gifts already a part of the trust’s principal.
There you go, that’s a Crummey Trust. Get the “play on words” now? Clever, right? My hope is that this post taught you some of the foundational concepts for a Crummey Trust. And, as always, if this is something you are considering for yourself or considering to use in your practice, consult an experienced estate planning attorney first. And, to keep you hungry for more, another use for Crummey Trusts is to protect life insurance from federal estate taxes, but I will leave that strategy for another post in the future.
– Attorney Matthew D. Brehmer
© 2014 Matthew D. Brehmer and Crummey Estate Plan.