Although a Last Will and Testament remains the most common way to distribute an estate, a significant number of people choose to use a trust in lieu of, or in addition to, a Will to distribute their estate. If you are named as a beneficiary of a trust, it usually means you are entitled to distributions from the trust according to the terms created by the Settlor. What does it mean though if you receive a “Crummy notice?” Let’s find out more about a Crummy notice and what to do if you receive one.
How Does a Trust Work?
Understanding a Crummey Notice can only be accomplished if you first understand some trust basics some trusts basics. Trusts are broadly divided into testamentary and living trusts. Living trusts are then further divided into revocable and irrevocable living trusts. The person who creates a trust is referred to as the “Settlor” (or Grantor, Maker, or Trustor). The Settlor appoints a Trustee whose overall job is to administer the trust using the terms created by the Settlor as well as manage and invest the trust assets. A trust must be funded using assets chosen by the Settlor. Sometimes, however, assets may need to be added to the trust after the trust’s original creation. When that happens, a Crummey Notice must be sent out to beneficiaries.
What Is a Crummey Notice?
The term “Crummey Notice” is so named because of the court case that created the legal notice requirement. At its most basic, a Crummey Notice is just a letter letting a beneficiary know that assets have been added to a trust and informing the beneficiary of his/her right to withdraw those assets if applicable. The law requires such a notice to be sent to ensure that beneficiaries of a trust understand their rights. It shul also notify a beneficiary of the time frame within which a withdrawal must be made.
Do I Need to Do Anything If I Received a Crummey Notice?
What you do after you receive a Crummey Notice depends on several factors. The first of those is the type of trust created and the second is the purpose of the trust. Sometimes, it is counter-productive for a beneficiary to act on the notice because withdrawing the assets goes against the trust purpose. The most common example of this is when the trust is an irrevocable life insurance trust, or ILIT.
An ILIT works by creating an irrevocable trust and then transferring in, or purchasing, a life insurance policy wherein you are the insured. Upon your death, the proceeds of the life insurance policy are then paid out to the trust. The terms of the trust agreement then dictate how the proceeds are spent. Premiums for the life insurance policy during the time you are alive are paid by the trust. Understandably, it would be an additional benefit if the funds you gift to the trust for the payment of those premiums were also tax-free. Without the addition of a Crummey power, gifts to an ILIT would not be eligible for the yearly gift tax exclusion because the gift must be one of “present interest” to be eligible for the tax-free treatment. If the “gift” cannot be immediately accessed by the beneficiaries, the gift creates a future interest, not a present interest. As soon as you add a “Crummy power,” however, your gift becomes eligible for the yearly gift tax exclusion.
Although the “Crummey power” gives the trust beneficiaries the right to withdraw the funds gifted to the trust immediately after they are transferred in to the trust, doing so runs counter to the trust purpose. Those funds are intended to be used to pay the premiums on the life insurance policy – a policy that will ultimately pay out a considerable sum of money to the beneficiaries after your death. So in this case, the idea is for a beneficiary to effectively ignore the notice.
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We don’t like to contemplate our own deaths. But slightly less objectionable are current strategies to reduce exposure to gift tax, get assets in loved ones’ hands, and protect against estate taxes. If your estate is less than $5 million (or $10 million with your spouse) you may think you no longer need to worry about any of this. But we don’t know if that will remain so.
The estate tax could come back with a vengeance in 2013. A “Crummey” trust takes its name from a famous tax case involving Reverend Crummey, who was probably teased mercilessly growing up. See Crummey v. Commissioner. To follow in his footsteps, set up a trust and have it buy a life insurance policy on your life. Someday when you die, the trust will receive the insurance proceeds and pay them out to the beneficiaries listed in your trust.
To pay the annual premiums on the policy, you can put in up to $13,000 per person for your family members. Since you are essentially buying a policy that benefits your family, those premium payments would normally be considered gifts to your beneficiaries. However, done properly, you pay no gift tax on those payments, and when you die the trust will receive the policy proceeds free of estate tax.
The big catch is administrative. Technically, the trustee of the trust should send out “Crummey letters” each year informing beneficiaries they can withdraw the gifted amount during a specified window, perhaps 30 days. Usually, the beneficiary leaves the money in the trust. But the IRS considers it a tax-free gift only if the person has the right to take it in the short term. An annual Crummey letter proves it even if none of the kids follows up on it—as you generally hope they won’t.
The Crummey power idea—giving the beneficiary the right to withdraw money which you hope they will never exercise—can be added to various other trusts too. However, the place most people fail is in bothering to send out the annual letters, and documenting that they did. One recent Tax Court case, Estate of Turner v. Commissioner, didn’t spoil the deal over the failure to send letters, but you can’t count on the IRS agreeing with that result. Get reliable professional help with such trusts, and make sure the duty to send out the annual letters is very clear so it doesn’t fall between the cracks.
For more, see:
Crummey Trusts Still Smart, Say Advisers
Beware New Estate Tax Election
Estate Legal Settlements: Rose-Colored Hindsight?
Editorial StandardsCorrectionsReprints & Permissions
In the United States, a Crummey trust is a trust for the benefit of individuals into which gifts are made in a manner qualifying them for exclusion from the unified gift and estate tax. The trust is named for the first person to use such a structure, D. Clifford Crummey.
Normally, gifts to minors are subject to parental / guardian control until the age of majority. In order to delay the transfer of control beyond the age of 18, the funds must be placed in trust. However, the annual gift exclusion from the gift tax ($16,000 per individual and $32,000 per married couple as of 2022[1]) is only available for gifts of so-called present interests. Normally, a gift into a trust that comes under control of the beneficiary at a future date does not constitute a present interest.[2] A Crummey trust achieves an effect desired by some creators of such trusts by offering the recipient a window of time to take immediate control of the gift (often 30 days). The control offered only applies to the current gift - typically, an amount no greater than the annual exclusion amount - not the entire trust. If the recipient fails to exercise the right to withdraw from the trust during that window, the gift becomes part of the trust and is thereafter subject to the trust's distribution conditions. However, since the recipient had the opportunity to receive the funds outside of the trust in a given tax year, the gift is deemed to be a present interest, allowing it to be subject to the annual gift exclusion.[3] The expectation of future annual gifts under the same mechanism (or the expectation of the withholding of such future gifts if the recipient exerts control over the gift) may motivate the recipient to relinquish control of the funds into the trust.[3] Some trusts may even explicitly state that exercise of the withdrawal provision will lead to "no further financial gifts [being] made" to the trust in future years.[2]
A Crummey trust is also referred to as a Crummey provision or a Crummey power.[3] A Crummey provision can be contained within another type of trust. Some life insurance trusts will have a Crummey provision.[3] A Crummey provision is typically a provision within another trust[citation needed] and ordinarily works as follows. The grantor makes a gift to an irrevocable living trust. The trust beneficiaries are notified by the trustee that they have the power to withdraw some or all of the gift to the trust for a specified time period. The simultaneous acts of the grantor transferring property to the trust and the trust beneficiaries being permitted to withdraw the gift from the trust is deemed to be the same as giving the gift to the beneficiaries outright. The gift to the trust with the Crummey provision now qualifies for the annual gift exclusion.[3]
The Crummey Trust is named after D. Clifford Crummey, who first came up with the concept in the 1960s. The U.S. Tax Court found this action legal in 1968, and the nickname "Crummey Power" stuck.[3] See Crummey et al. v. Commissioner of Internal Revenue, 397 F.2d 82, (9th Cir.1968).
- Rabbi trust
- ^ Rubin, Laura Saunders and Richard (2022-03-10). "Estate and Gift Taxes 2021-2022: What's New This Year and What You Need to Know". Wall Street Journal. ISSN 0099-9660. Retrieved 2022-03-22.
- ^ a b Lake, Rebecca (10 August 2020). "What Is a Crummey Trust and How to Use One?". smartasset.com/.
- ^ a b c d e f Crenshaw, Albert B. (13 February 2000). "Will the Crummey Crumble?". The Washington Post. Retrieved 7 February 2021.
- Crummey et al. v. Commissioner of Internal Revenue, 397 F.2d 82, (9th Cir. 1968), via OpenJurist.
- //www.willsandprobate.com/FAQ/crummey.htm
- //www.finaid.org/savings/crummey.phtml
- //www.fool.com/personal-finance/retirement/2006/11/14/crummey-trusts-arent-crummy[permanent dead link].
- //www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes
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