December 14, 2010

Crummey Trust

The following are questions commonly associated with Crummey Trusts:

1. What is a Crummey Trust?

A Crummey Trust is a trust in which the beneficiary, a child for example, has the power to withdraw monetary contributions made to a trust for a short period of time, 45 days for example, such that the transfer qualifies for the annual gift exclusion. IRC §2503(b). Once the withdrawal period has expired, the contribution becomes subject to the terms of the trust.

2. What purpose does a Crummey Trust serve?

A Crummey Trust is used to obtain the annual gift tax exclusion through the medium of an irrevocable trust.

For illustrative purposes, the following hypothetical should be helpful:

Samuel is a wealthy industrialist who would like to gift money to his teen aged children Bobby and Beth. Rather than give the money to his children outright, which would be most likely considered imprudent given teenager immaturity. Samuel decides to create a Crummey Trust so that he can take advantage of the annual gift tax exclusion while simultaneously keeping the trust in control of the money. 

Samuel appoints Theo to become the trustee of his childrens' Crummey Trusts by giving him $13,000 to hold in trust for Bobby and $13,000 to hold in trust for Beth. Each year thereafter, Samuel gives Theo $13,000 for Bobby's trust and $13,000 for Beth's trust. By gifting the money through a Crummey Trust, Samuel avoids having to pay gift tax for these contributions. Also, Samuel does not have to worry about his children quickly frittering away the money because the trust will restrict when distributions are made.

3. Who is the intended beneficiary of a Crummey Trust?

A child is the intended beneficiary when making a Crummey Trust.

4. Are there ongoing requirements?

Yes, each time a person gifts money (or property) to the trust, notice needs to be given to the beneficiary informing them of their ability to withdraw all or some of the contribution from the trust within a certain number of days. There is no definitive rule on the duration of the power to withdraw, although the IRS has allowed the annual exclusion for periods as short as 15 days. See, e.g., Estate of Maria Cristofani (1991) 97 TC 74, acq 1992-1 Cum Bull 1, acq 1996-2 Cum Bull 1.

For illustrative purposes, presume that on March 1, 2010 Samuel donates $13,000 to each child's Crummey Trust. Thereafter, Theo the trustee gives notice to Bobby and Beth that they may withdraw all or some of this $13,000 from the trust within 30 days . While each child has the ability to withdraw the $13,000, it is highly unlikely that either child would do so because this will strongly discourage Samuel from ever donating money to the child's Crummey Trust. Regardless, once those 30 days have elapsed, namely come April 1, 2010, the $13,000 for each child becomes the property of each's Crummey Trust.

5. Is a Crummey Trust irrevocable?

Yes, a Crummey Trust is irrevocable. Thus, once a person creates a Crummey Trust, they cannot later on revoke it. This is particularly important, since most trusts written in California, colloquially referred to as "living trusts", can be revoked.

6. Where does the name "Crummey Trust" come from?

The term "Crummey Trust" is derived from the court case which validated its usage. Crummey v Commissioner (9th Cir 1968) 397 F2d 82.

7. How much does it cost to write a Crummey Trust?

There is no mandatory minimum or maximum attorney fee to draft a Crummey Trust.

8. In light of the attorney fee, can I write my own Crummey Trust?

Yes, California law explicitly says that you may act as your own lawyer. However, given the technicalities associated with a Crummey Trust, it is not a document that can be easily drafted by a non-attorney. Frankly, few legal documents should ever be drafted without the assistance of an attorney.

Furthermore, since a Crummey Trust involves large sums of money, it is logical to presume that a person wanting a Crummey Trust can afford the attorney fee to create a Crummey Trust.