“Crummey Estate Plan”…Why “Crummey”?

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.

Haunted By Student Loans: Students and Parents Beware

Grieving student loan borrowers across the country are finding out the hard way about a potentially catastrophic provision in many private student loan contracts: If the co-signer of the student loan dies, the loan holder can require complete and immediate repayment of the loan. Put differently, a student loan borrower who is making their student loan payments on-time, but whose co-signing parent (or other co-signer) dies, could be forced into default upon the death and be required to repay the entire loan immediately. The same is true if the co-signer declares bankruptcy. Furthermore, if the student loan borrower dies and has a co-signer, the lender can require the co-signer to assume full responsibility for the loan after the borrower’s death.

What lender would actually enforce such a provision? Not all that surprisingly, the Consumer Financial Protection Bureau (CFPB) said in a new report this past April that it has received complaints from student loan borrowers about being notified by their lenders that they have to fulfill their entire student loan obligation when their co-signing parent dies (full report available here). This is true even if their loans are in good standing and current. And, that’s not all; the lenders are also trying to collect from their co-signing parent’s estate (even if the student loan was not in default prior to the co-signer’s death). This could have a substantial impact on the size of the estate left for your loved ones after you pass.

However, it is not all that certain how often this happens. Richard Hunt, president and CEO of the Consumer Bankers Association, said that he is not aware of any lenders who practice this and called it a “rare occurrence.” It should be noted though that according to a recent report on private student loans published by the CFPB and the Department of Education, more than 90% of new private student loans were co-signed in 2011, often by a parent or grandparent; compared to only 67% in 2008. That combined with the increasing amount of outstanding student loans and the growing age of these co-signers, leads one to believe that this practice could become more than a “rare occurrence” in the years to come.

In addition, the CFPB stated in its report that based on the complaints from private student loan borrowers, the lenders were automatically placing these loans in default upon the death of a co-signer (i.e., immediately due in full). The death of a co-signer is usually determined by a third-party who conducts scans of public records of death filings, which are then electronically matched to consumer records and trigger a default, regardless of individual circumstances. Rohit Chopra, the CFPB’s student loan ombudsman, cautioned borrowers about the effects of such a default: “Borrowers need to be aware that these defaults can seriously impair their credit profile,” making it hard (or even impossible) to start a business, buy a house or buy a car.

Herein lies the problem: you have a student loan borrower who is making his/her payments on time and building his/her credit in order to obtain a loan for a business, house or car. Then misfortune strikes in the loss of a parent or other close relative (who is also the co-signer on his/her student loans). The student loan lender, by a search of the public records, discovers that the co-signer on this borrower’s loan has died and immediately, without consideration of the individual circumstances, places the borrower’s loan in default and calls for its full outstanding balance to be paid. Most borrowers will not be able to meet such a demand and this will destroy their credit for years to come. Their plan to start a business or buy a house will be delayed, if not, completely destroyed, all because of this little provision put in their student loan contract. And, not only that, but if the student loan lender collects from the deceased co-signer’s estate, it could substantially impact the amount left for the deceased’s loved ones. All but for this provision, this borrower may have been able to pay back his/her entire student loan balance in on-time payments like he/she was doing before the death of the co-signer.

Luckily for students and co-signers, you don’t have to wait for the private student loan lenders and the politicians to come to any agreement about how to best fix this problem. You can be proactive now. Many private student loan lenders do offer an option to release a student borrower’s co-signer after a certain period of on-time, consecutive payments and a credit check to determine if the student is eligible to repay the loan on his/her own. If your lender offers a co-signer release, you will want to ask about this benefit and remove your co-signer as soon as you are eligible.

However, many of the complaints that the CFPB received were from borrowers describing the many obstacles they faced when seeking to obtain such releases. In addition, many of the complaints stated that while borrowers often have to apply for the release, the lenders and servicers generally do not make the criteria for the co-signer release clear and transparent; nor do they make the required forms available on their websites or in electronic form.  Moreover, lenders are not notifying students when their loans qualify to have the co-signers released.

While getting a co-signer released may seem like a daunting task, private student loan borrowers and co-signers should be proactive and try to obtain such a release. The CFPB has even released sample letters for both the borrower and co-signer to complete and send to their private student loan lenders (available here). Another option that you may want to consider is buying life insurance to cover what the outstanding balance of the loan may be on the death of either the student or co-signer. While it may be a relatively cheap option to purchase life insurance for a young borrower, it may not be for an older co-signer. If insurance is purchased it is important to make sure that the benefits are payable to that individual’s estate or are assigned by the beneficiary to settle the student loan debt. This should minimize the impact on your estate and loved ones if you were to pass away and the student loan lender required immediate and complete repayment of the student loans.

While we wait for more guidance on this issue, it is up to you to protect yourself. At the very least, the borrower and the co-signer should be inquiring from their private student loan lenders about how to apply for or obtain a release of the co-signer. This can be accomplished by placing a phone call to your lender or by completing and sending one of the sample letters that the CFPB provides on its website.

– Attorney Matthew. D. Brehmer

 

© 2014 Matthew D. Brehmer and Crummey Estate Plan.