Annual gifting can be a wonderful way of giving to your loved ones while taking advantage of the gift tax exclusion that reduces your potential estate tax liability. By strategically using the exclusion, you can give away a specific amount each year ($14,000 in 2013) to an unlimited number of individuals, free of gift and generation-skipping transfer tax. There are a few different options you can utilize for making the gift. You can make an outright gift or use a traditional custodial account that is easy to create and maintain. With both these options, the individual gets immediate access to the money or takes control at a predetermined age, 18 or 21. If this is not what you want, consider using a Crummey Trust instead.
The Crummey trust is named after a court case that paved the way for the use of this type of trust. It allows you to transfer property with the intent that it remain in the trust until the beneficiary reaches an appropriate age or series of ages (e.g., age 30, 35, and 40 ) or events (e.g., college graduation or marriage), or both. You are the one who decides how the money is to be used, how much the beneficiary can receive, and at what point in time.
There’s one crucial thing to know before you decide to set up a Crummey trust: annual contributions made to the trust won’t qualify for the annual gift tax exclusion unless the beneficiary is notified that a contribution has been made to the trust and given the right to receive that contribution. Once the beneficiary has been notified, he or she is given a limited period (usually 30 days) to withdraw the contributions from the trust. It’s usually understood that the beneficiary won’t exercise his or her right to withdraw the contribution, and it will remain in the trust. However, that expectation should be discussed by the donor and the beneficiary because there can be nothing to prevent the beneficiary from withdrawing the contribution other than the implied possibility that the donor won’t make future contributions to the trust. The IRS requires the beneficiary’s right to withdraw the funds to be absolute for the gift to qualify for the annual exclusion. So, while the donor’s expectations can be discussed with the beneficiary, those discussions should remain unwritten.
A Crummey Trust can provide the flexibility and control that is missing from other types of gifting programs. It can be a valuable tool in estate planning and is worth consideration.
Please call your LSL CPAs & Business Advisors if you would like to discuss the benefits of setting up a Crummey Trust or for more information about the trust that is right for you and your family.
