Crummey Trust and Crummey Powers

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How do Crummey powers get around the rule that a future interest is not a completed gift?

Crummey vs. Commissioner was a tax law case decided by the 9th Circuit in 1968. It established that an annual gift tax exclusion was available for gifts paid into a trust. Previously this was not allowed by the IRS, because, generally, a gift to a trust is considered a future interest. Future interest are not considered completed gifts, therefore, until Crummey, no gift tax exclusion. To get around this hallowed principle that a gift has to be a present interest, the court decided that in this particular trust the beneficiary had to be given “Crummey powers“, specifically:

  • The beneficiary must have notice of the gift
  • The beneficiary has the right to withdraw the gift from the trust
  • This right can expire after a reasonable length of time, for example, 30 or 60 days.

In other words, the beneficiary can convert a future interest into a present interest by withdrawing funds from the trust, if she so desires.

What are some uses of a Crummey trust?

The beneficiary does not usually withdraw funds from the trust, although she could. This is because the trust is designed to allow the accumulation of significant funds, for example, in an investment account. Were the beneficiary act against this principle, the settlor would be unlikely to continue to make gifts into the trust. A Crummey trust is designed to be an irrevocable non-grantor trust, and as such is not considered part of the settlor’s estate and is not subject to the federal estate tax. See: What’s the difference between a grantor and non-grantor trust?

The trustee could also purchase life insurance on the life of the settlor funded with the annual gifts into the trust. Depending on how much was paid into he life insurance, at the settlor’s death a significant amount of insurance proceeds would be paid into the trust, again not part of the settlor’s estate and not subject to estate tax.

See related:

Who pays gift taxes and how much?
Trusts, a general overview.

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