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Wolfley Law Office, P.S.

713 E 1st Street
Port Angeles, WA 98362
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Telephone: (360) 457-2794
Fax : (360) 457-2045

Office Hours

Mon - Friday
9 am - 12 pm
Closed for Lunch
1 pm - 5 pm

Crummey Trusts: The Good Kind (Estate Planning)

Crummey Trusts: The Good Kind (Estate Planning)

Anyone is allowed to gift property, free of taxation, up to the gift tax exclusion amount each year to each of an unlimited number of lucky people (we call them “donees” or “beneficiaries”).

If the done is a minor (under 18 years old), many parents and grandparents make their annual gifts to a custodial account under the Uniform Gifts to Minors Act (UGMA). A UGMA account works well and is easy to create and maintain.

However, is has one major shortcoming: when the child (or grandchild) reaches age 18 or 21, depending on the state in which the beneficiary resides, the beneficiary can do whatever he or she wants with the money in his or her custodial account. If, for example, the beneficiary wants to buy a sports car instead of going to college, there is nothing his benefactor can do about it.

Few parents wish their children to receive significant amounts of cash at age 18 or 21. Fortunately, there is a special kind of trust that avoids this problem. It’s called a “Crummey” trust. Funny name for trust that’s of a good quality, true, but it’s named after a court case that paved the way for this kind of trust.

With a Crummey trust, the property can remain in trust for as long as the trustor wishes without forfeiting the gift tax annual exclusion. So, you can transfer property to a Crummey trust for the beneficiary’s entire lifetime or until an appropriate age (say, 30 or 40) or event (like a graduation from college). You decide how the money is to be used and how much the beneficiary can receive.

There’s on catch: annual contributions you make to the trust won’t qualify for the gift tax annual exclusion unless you notify the beneficiary that you’ve made the contributions, and given him or her a limited period of time (usually 30 days) in which he or she can withdraw the contributions from the trust.

It’s usually understood that the beneficiary won’t withdraw, but will let them remain in the trust. However, that expectation should always remain unwritten because, if there’s any evidence of it, the IRS will use that evidence to say that the beneficiary didn’t really have a power of withdrawal.

If the beneficiary violates the unwritten understanding by withdrawing property from the trust, there’s nothing you can do about it, except to show your displeasure by not making any further contributions to that beneficiary’s trust.

Call me up if you want to discuss setting up a Crummey trust (which is a good trust) for your children or grandchildren.

Crummey Trusts: The Good Kind (Estate Planning)