Crummey Trusts in New York

A Crummey Trust is an irrevocable trust designed to allow gifts to the trust to qualify for the annual gift tax exclusion. It is named after the taxpayer in the landmark case Crummey v. Commissioner, which established the legal principle behind this type of trust.

As of 2024, the annual federal gift tax exclusion allows individuals to bestow up to $18,000 per recipient each year without triggering any gift tax liability. To qualify for this exclusion, the recipient must have a present interest in the gift, granting them control over the gifted assets for a specified period upon receipt. Consequently, gifts made to irrevocable trusts typically fall under the purview of gift tax, with the notable exception of Crummey trusts or trusts incorporating Crummey powers, which adhere to the present interest requirement.

What is a Crummey Trust?

In a Crummey Trust, the grantor makes a gift to the trust, and the beneficiaries are given the immediate right to withdraw the gifted amount for a limited period (usually 30-60 days). This immediate withdrawal right is known as a "Crummey power" and is essential for the gift to qualify for the annual gift tax exclusion. Although beneficiaries have the right to withdraw the gifted funds, there is typically an understanding or expectation that they will not exercise this right. This allows the funds to remain in the trust and be managed according to the terms of the trust agreement. The Crummey power is the legal mechanism that converts the gift to the trust into a present interest gift, qualifying it for the annual gift tax exclusion. Each time a gift is made to the trust, the beneficiaries must be notified of their withdrawal rights and given a reasonable time to exercise those rights.

In a 1999 letter ruling, the IRS outlined four criteria that a trust must meet to qualify as a Crummey Trust:

• The trust must provide the beneficiary with sufficient notice of their right to withdraw funds.
• The trust ust allow a reasonable timeframe for the beneficiaries to exercise this right of withdrawal.
• When a beneficiary chooses to exercise their withdrawal right, they must have the ability to access and use an amount equivalent to the contribution made to the trust, without any restrictions.
• There can be no formal or informal understanding or agreement that the beneficiary will refrain from exercising their withdrawal right.

Despite the existence of the Crummey power, a Crummey Trust enables the grantor to maintain indirect control over the distribution of trust funds to the beneficiaries by specifying the terms in the trust agreement. Because the trust is irrevocable, once property is transferred into the Crummey Trust, the grantor relinquishes direct control over the trust assets. The trust agreement can outline specific conditions for distribution, such as releasing funds for particular purposes or at predetermined ages or milestones. When properly structured, an irrevocable trust like a Crummey Trust can protect assets from the beneficiaries' creditors, as the beneficiaries lack direct ownership or control over the trust assets, and their withdrawal rights are usually limited in duration.

Crummey Trusts and the Irrevocable Life Insurance Trust

One of the most common uses of the Crummey powers is in an irrevocable life insurance trust. An Irrevocable Life Insurance Trust (ILIT) is a trust designed to own and be the beneficiary of one or more life insurance policies on the grantor's life. The primary purpose of an ILIT is to remove the life insurance proceeds from the grantor's taxable estate, thereby reducing potential estate tax liability. By transferring ownership of the life insurance policies to the ILIT, the grantor relinquishes control over the policies and their proceeds. To keep the life insurance policies in force, the ILIT must have sufficient funds to pay the premiums. Grantors often make gifts to the ILIT to cover these premium payments, but such gifts are typically considered future interest gifts because the beneficiaries do not have the immediate right to access or use the gifted funds. Without a Crummey power provision, these premium payment gifts would not qualify for the annual gift tax exclusion and could be subject to gift tax.

To convert premium payment gifts to present interest gifts, ILITs often include a Crummey trust provision. This provision grants the trust beneficiaries the immediate right to withdraw the gifted amounts used for premium payments for a limited period, typically 30-60 days. By giving the beneficiaries this temporary withdrawal right, the premium payment gifts are transformed into present interest gifts eligible for the annual gift tax exclusion.

Under a Crummey trust provision, the ILIT beneficiaries must be given written notice of their withdrawal rights each time a gift is made to the trust. The notice informs the beneficiaries of the amount of the gift, their right to withdraw the funds, and the time frame within which they must exercise this right. The beneficiaries' withdrawal rights are typically limited to the lesser of the gifted amount or the annual gift tax exclusion amount.

After the specified withdrawal period (e.g., 30-60 days), the beneficiaries' withdrawal rights lapse, and the gifted funds remain in the ILIT to pay the life insurance premiums. The lapse of withdrawal rights is an essential aspect of the Crummey trust provision, as it allows the trust to retain control over the funds while still meeting the present interest requirement for the annual gift tax exclusion. However, the lapse of withdrawal rights may have tax implications for the beneficiaries, particularly if the lapsed amount exceeds the greater of $5,000 or 5% of the trust's assets. In such cases, the excess amount may be considered a taxable gift from the beneficiary to the trust.

Crummey trusts have become a popular estate planning tool to give annual gifts to children without incurring gift tax. It requires careful drafting of the trust to ensure it complies with IRS regulations to qualify for gift tax exclusion. Should you need assistance in establishing a Crummey Trust, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233.