estate planning attorney

Lifetime Gifts: An Important Estate Planning Technique (Part 2)

In Part 1 of this post, I focused on the similarities and differences between making annual gifts and making lifetime exemption gifts. Here, in Part 2 of this post, I will focus on the following reasons why it may still be important to consider making lifetime gifts:  

  • To minimize estate taxes;
  • To engage in Medicaid planning;
  • To provide for your loved ones during your lifetime; and
  • To decrease the size of your estate for easier estate administration after your death.

Minimize Estate Tax

Currently, in 2015, the estate tax exemption amount is $5.43 million. That combined with your spouse’s lifetime exemption amount if you are married, comes to $10.86 million. Therefore, for a vast majority of the population, minimizing estate tax is not even going to be on the radar. However, even though this exemption is permanent and indexed for inflation currently (and has been since 2010), Congress could always repeal it and lower the exemption amount; for instance, just seven years ago the exemption was only $2 million and if you look back another ten years before that, it was only $625,000. If Congress chose to go back to the “good old days,” a lot more of us would be subject to the estate tax. Keep that in mind.

For those of you who are unlucky enough (or, maybe I should say lucky enough) to be above the estate tax exemption, lifetime gifting is a great strategy to minimize estate taxes. Basically, by gifting assets away during your lifetime, either through annual gifts or lifetime exemption gifts, you are in essence “freezing” part of your estate. Consider the two following examples:

Example 1: You and your spouse have a $20 million estate today. You both live another 20 years, during which time your estate earns 6% annual interest and is now valued at about $64 million. Assuming the estate tax exemption increases at 3% during that same time, your combined estate tax exemption amount is about $19.5 million. Therefore, about $44.5 million of your estate will be subject to estate tax, which comes to about $17.8 million in estate taxes (at a 40% estate tax rate).

Example 2: You and your spouse have a $20 million estate today. Using $10 million of your combined estate tax exemption amount, you make a lifetime gift of $10 million, bringing the value of your estate down to $10 million. Assuming the same 6% interest, after 20 years, your estate is now worth about $32 million. And, assuming the same estate tax exemption amount as in Example 1 (about $19.5 million twenty years from now), you would have about $9.5 million of combined estate tax exemption left to use ($19.5 million – $10 million previously used). Therefore, about $22.5 million of you estate will be subject to estate tax, which comes to about $9 million in estate taxes.

As you can see from the two examples above, by making a lifetime gift, you can save a substantial amount in estate taxes; $8.8 million in the examples above. Furthermore, the two examples above are stripped down for ease of illustration; if you took annual gifts into account each year and also used up the increase in the lifetime exemption amount each year, the savings would be even more substantial (plus there are many other strategies that can make lifetime gifting even more effective, e.g., by applying discounts to certain assets when gifting).

The main reason why this works so well is because your estate is typically going to grow at a faster rate than the estate tax exemption amount (and the greater the arbitrage, the greater the effect lifetime gifting can have on your eventual estate tax liability). Basically, meaning that, when you make a lifetime gift and rid your estate of that asset, you also rid your estate of the accumulation that the asset is going to make over your remaining lifetime. So you are in effect, freezing the value of that asset and the amount of your lifetime exemption that it is going to offset.

However, there is one major caveat to consider here and when considering any other reason to make lifetime gifts. When you die with an asset in your estate, the asset receives a step-up in basis. When you gift an asset during your lifetime, the asset has a carry-over basis. Below are two examples that illustrate the difference:

Example 1: Years ago you bought an asset for $10. It is now worth $100. The day before you die you gift it to your child. Your child then receives a carry-over basis of $10. If your child were to sell that asset when it is worth $110, your child would be subject to long-term capital gains tax on $100 ($110 – $10).

Example 2: Years ago you bought an asset for $10. It is now worth $100. You die with the asset and bequest it to your child. Your child then receives a step-up in basis of $100. If your child were to sell that asset when it is worth $110, your child would be subject to long-term capital gains tax on only $10 ($110 – $100).

As you can imagine, that difference plays a major role when considering lifetime gifting. In some instances, it may be a deal breaker, and in others, it may not affect the decision as much. For instance, if you will be subject to estate taxes, it may be more beneficial to reduce your estate before you die even if your child would be subject to more capital gains tax on that asset because the highest long-term capital gains tax rate is only 23.8% (which includes the net investment income tax) compared to a 40% estate tax rate. However, if you are not subject to the estate tax, it may be more beneficial to keep low basis and high growth assets in your estate so that when you pass away, those assets will receive a step-up in basis and save your heirs substantial amounts in long-term capital gains tax.

Medicaid Planning

Nursing home costs are a major concern for many (and, with good reason, the national average nursing home costs are around $6,500 a month).  Long-term nursing home care can wipe out your entire estate pretty quickly. Therefore, Medicaid planning has become a large part of estate planning today. And, one of the most used Medicaid planning strategies is lifetime gifting.

Each State has its own complex set of rules when it comes to Medicaid planning with lifetime gifting and the rules are forever changing so it is important to contact an expert when considering this strategy. However, the basic strategy is this – to gift away your assets prior to the Medicaid look back period (depending on your State that look back period could be 3 years, 5 years, or some other time period).

There are a number of risks associated with lifetime gifting that are especially pertinent here. Once you’ve made a gift it is irrevocable. Meaning that the person you gave the gift to now owns it. You cannot get it back. Furthermore, the person who you gave the gift to is now at risk of losing it; for example, to creditors, to a divorcing spouse, to different heirs if they pass away, etc. This means that the person you gave the gift to may not be able to support you later on should you need it.

All of these risks are heightened during Medicaid planning. This is because if you don’t make it past the look back period, you will be hit with a penalty period based on the gifts given during that look back period. During that penalty period you will not receive support from Medicaid for nursing home costs, which could really leave you in a tough spot if you have no other access to support. Furthermore, if you never end up needing Medicaid and living a long life outside of a nursing home (like we all hope), you may no longer have enough to support yourself because you gifted it all away. Therefore, lifetime gifting as a Medicaid planning technique must be discussed with an expert to ensure you are weighing all of the benefits and risks associated with it.

Providing for Loved Ones During Life

Lifetime gifting may be a great way to provide for your loved ones during your lifetime. If an annual gift is less than $14,000 to any one person, not only will there be no tax liability, there is no requirement to file a Gift Tax Return. Even if the gift is greater than $14,000, there will be no tax liability so long as you have not used up your entire current lifetime exemption amount of $5.43 million. However, you will be required to file a Gift Tax Return to report a gift greater than $14,000 to any one person within the same year.

Lifetime gifts can be a great way for people to support their loved ones during their lifetimes without the fear of tax consequences or added responsibilities (like filing another tax return). However, you do need to consider the carry-over basis versus step-up in basis discussion above if gifting securities and/or property as opposed to cash.

Ease of Estate Administration at Death

Lifetime gifting may also be a great way to ease the administration of your estate at the time of your death. Typically, the smaller the estate, the easier it is to administer it at death. Furthermore, the type of assets that are held in your estate at the time of your death can determine how easy or how cumbersome administering your estate will be. If your estate is made up of entirely nonprobate assets, then administering your estate will be relatively easy. However, if you estate is made up of many different probate assets, then administering your estate will become more cumbersome and expensive.

By making lifetime gifts that reduce the value of your estate and rid your estate of probate assets, you can really lift some of the burden and costs that fall on your loved ones when having to administer your estate after your death. Again, however, you do need to consider the carry-over basis versus step-up in basis discussion above. Furthermore, you do not want to diminish your estate to a level where it becomes difficult for you to live day-to-day.


As you can see from above, lifetime gift planning is still very much alive in estate planning today. And, this holds true even for those who are not concerned about estate taxes. However, there are many things that need to be considered before making a lifetime gift and they should be discussed with an expert. But, if after weighing all of the risks and benefits, the scales are tipped in your favor, lifetime gifting can provide an important estate planning technique that starts to take effect prior to much of your other estate planning.

Thanks for reading!


© 2015 Matthew D. Brehmer and Crummey Estate Plan.

“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.