Business and Law

A “Crummey” Trust is a popular device used in making gifts that qualify for the $13,000/ $26,000 annual exclusion from gift tax. Most other forms of gifts that qualify for the annual exclusion require an immediate or at least a very early (i.e., age 21) distribution of the assets to the beneficiary. Since 1998, the gift tax annual exclusion has been indexed annually for inflation. The Crummey Trust takes its name from a court case upholding this type of trust and supporting its tax benefits.

Each time a contribution is made to a Crummey Trust, a temporary right (usually 30 days) to demand withdrawal of that contribution from the trust is available to the beneficiaries. If the demand right is not exercised, the contribution remains in the trust for management by the trustee. Because the right of withdrawal is not usually exercised, the trustee may use the funds (income and/or principal) for some purpose desired by both the trust grantor and the beneficiaries.

In funding Crummey Trusts, the vehicle of choice is most often life insurance, because when the grantor-insured dies, the insurance proceeds (which are income tax free) can be used to provide benefits to the surviving spouse, children and/or grandchildren. Properly structured, the insurance proceeds are not taxed in the estate of the grantor or the estate of the grantor’s spouse. Moreover, when both spouses have died, the insurance proceeds can then be used to help pay the federal estate tax that may be due. This is accomplished by having the Crummey Trust purchase assets from, or loan money to, the estates of the grantor and/or the grantor’s spouse as allowed in the trust document. In essence, the irrevocable life insurance trust (“ILIT”) allows death taxes to be paid for the estate rather than from the estate.

For an existing policy transferred to the trust, the grantor-insured must survive at least three (3) years from the transfer of the policy to the trust. Otherwise, the insurance proceeds will be included in the grantor’s estate. This three-year rule can be avoided on a new policy by having the trust apply for the policy as the initial owner.

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