A Crummey Trust is a type of irrevocable trust that allows contributions to be treated as gifts for tax purposes, while also providing the beneficiaries with a limited right to withdraw the funds for a specified period. This mechanism is named after the case Crummey v. Commissioner, which established the legitimacy of this structure for estate and gift tax purposes.
In a Crummey Trust, the grantor makes contributions to the trust and notifies the beneficiaries of their right to withdraw a portion of the contribution for a limited time, typically 30 days. This right to withdraw is essential because it qualifies the contributions as present interest gifts, allowing the grantor to take advantage of the annual gift tax exclusion (which is a set amount that can be gifted each year without incurring gift tax). If the beneficiaries do not exercise their withdrawal rights within the specified period, the funds remain in the trust and are managed by the trustee according to the terms of the trust agreement.
For example, if a grandparent sets up a Crummey Trust for their grandchildren and contributes $15,000 in one year, each grandchild may be notified that they can withdraw, say, $5,000 each from that contribution within 30 days. If they choose not to withdraw, the funds remain in the trust for their benefit, which can be used for educational expenses or other purposes defined by the trust.
Crummey Trusts are particularly useful in estate planning to reduce the size of the grantor’s taxable estate while providing financial support to beneficiaries. They are often employed to fund life insurance policies, educational savings, or other financial goals, allowing families to pass wealth efficiently while taking advantage of tax exclusions.
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