STRANGE NAME, GREAT CONCEPT
A person is entitled to gift up to $14,000 per year without incurring any gift tax liability. There are some limitations to those gifts, however. The gift must be for the unlimited, present usage of the interest that is being conveyed. That creates problems for when someone wants to convey up to $14,000 per year to a minor but not have the same money handed over to the minor in its entirety when the minor reaches the age of 21. Gift tax liability is controlled by 26 U.S.C. § 2503. 2503(b) states that in order to qualify for the gift tax exclusion the giftor (person giving the gift) must convey a present interest. Subsection (c) states that if the recipient is a minor, the giftor can put the money into a trust that will convey the money to the minor when they are 21 years old and it will still be considered a present interest for purposes of gift tax liability. So, if you want to give $14,000 to a trust for a minor, with the intention that the minor not withdrawal all of the monies accumulated when they reach 21, so that they may obtain the benefit of compound interest and allow the $14,000 to grow even more, the Crummey trust is the right tool.
While the Crummey trust may have a strange sounding name, it comes from the name of the person who first created such trust, D. Clifford Crummey, and the resulting Tax Court opinion of 1966. It works by gifting a certain sum of money to a trust as a gift, with the right of immediate withdrawal from the trust by the recipient, with the expectation that the recipient will not withdrawal the money or liquidate the asset from the trust. The law recognizes the right to immediate withdrawal, not actual realization of the present interest as satisfying the present interest requirement under 2503. This right of withdrawal for a limited period of time is called the Crummey power. In 1999, the IRS issued a letter ruling on the Crummey trust and outlined the four criteria to qualify as a Crummey trust.
- The trust is required to give the beneficiary reasonable notice in which to exercise the withdrawal right; and
- The beneficiary is given adequate time following notice in which to exercise the withdrawal right; and
- Upon exercising the withdrawal right, the beneficiary will have the immediate and unrestricted right to an amount equal to the amount contributed to the trust; and
- There is no understanding or agreement, expressed or implied, that the withdrawal will not be exercised.
The Crummey Trust is best used when you want to control the release of funds over time rather than allow a minor to obtain a sizable chunk of money when they are 21 and perhaps not mature enough to control such sums of money. It also helps to shelter assets of the beneficiary from the potential reach of creditors. If the trustee is aware of the financial situation of the beneficiary and the grantor gives the trustee the power to suspend payment in certain circumstances, this can act as a very powerful bar to prevent creditors from reaching these funds.