Crummey Trust: The Catch-22 of gift giving
Normally, when you give someone a gift of money, they immediately get the money and the gift is concluded. At least, at law, that's how it works. And in 2020 you will be able to give a child or grandchild up to $15,000 a year without incurring gift taxes ($30,000 for married couples). But that begs the question: who wants to or would be comfortable just giving an 18 year old a lump sum of $15,000 cash? Or what about a family member with a drug problem? Perhaps you would rather they get the money in smaller amounts over time.
What are the options other than a lump sum?
One could create a trust that distributes the gift to the beneficiary over time, but then it's not a “gift” under the law. At least, it isn't a gift when you transfer the money to the trust. It doesn't become a gift until the trust transfers the money to the beneficiary and the beneficiary has a “present interest” in the funds. But what if you still wanted to give the gift this year?
And hence the Catch 22 of estate planning: how do you create a non-gift by creating a gift?
A Crummey Trust is one solution
The “Crummey trust” is named after the 2014 court case that authorized the scheme. They allows you to put money into a trust and still take advantage of the annual gift tax exclusion. It is essentially a four step process:
Money is put into an irrevocable trust.
The gift recipient (the beneficiary) is given a Crummey notice. It says that they have at least 30 days to withdraw the sum of money. This creates the present interest in the money.
The gift recipient is told in no uncertain terms (but not in writing) that if they withdraw the money, it will affect their inheritance or future gifts.
After 30 days of not being withdrawn, the money becomes inaccessible to the gift recipient. The trust then controls how the money is dispersed to the beneficiary.
By giving the beneficiary a present interest for 30 days, the funds temporarily become a gift. But that is enough: when the 30 days lapse, the gift becomes a non-gift. You are able to take advantage of the annual gift exclusion and control how the money is transferred to the beneficiary.
Takeaway
Estate planning is not just about drafting wills, trusts, and health care directives. It is a time for planning ahead and creatively and skillfully problem solving. If you have questions about whether a Crummey trust may be good for you, please contact Signature Law for a free consultation.