Crummey Trust: Definition, Purpose, How It Works, and History

What Is a Crummey Trust?

A Crummey Trust is an irrevocable trust that allows someone to provide financial assets to beneficiaries without using their lifetime gift tax exemption.

By transferring assets to the trust, rather than directly to beneficiaries, the grantor avoids the gift tax and maintains some control over the assets. Beneficiaries then have a time-limited opportunity to withdraw the funds.

A Crummey Trust can be an estate planning tool that is used to reduce a donor's taxable estate and transfer wealth to future generations.

Understanding Crummey Trusts

After setting up a Crummey Trust, the grantor deposits assets into it. At that point, beneficiaries are informed of the contribution by a Crummey letter (or notice) and typically have 30 to 60 days to withdraw it. Since each contribution is seen as a potential gift for beneficiaries, every time the grantor makes one, a Crummey letter must be sent.

The power to withdraw money from the trust gives beneficiaries a present interest in the money. This present interest must exist in order for the annual gift tax exclusion to apply. That's why it's so important that a Crummey letter be sent to beneficiaries to inform them of their power to withdraw funds.

Should a beneficiary not withdraw funds in the specified time period, the power to withdraw lifts and the assets remain in the trust. Trust assets are managed by a trustee who invests them for the long term and handles distributions, both according to the trust's terms (as set up by the grantor).

Annual Gift Tax Exclusion

The annual gift tax exclusion applies to gifts made to Crummey Trusts but doesn't affect the grantor's lifetime gift tax exemption. The IRS requires the gift recipient to have the aforementioned present interest in the gift for the exclusion to kick in. The beneficiary must be granted immediate access to the gift, as long as they are not a minor under the age of 18. 

Use by Parents

Crummey trusts usually are used by parents to provide their children with lifetime gifts while sheltering their money from gift taxes and keeping control over the money to a certain degree. The tax exemption is valid as long as the gift's value is equal to or less than the permitted annual exclusion amount.

For calendar year 2024, that amount is $18,000 per recipient. A Crummey trust allows a family to continue to make annual gifts while placing the money in a protected fund.

History of the Crummey Trust

The Crummey Trust is named for Clifford Crummey, the first successful taxpayer to use the estate planning technique described above.

After he established a trust in 1962, the Internal Revenue Service (IRS) attempted to deny him and his family the annual gift tax exclusion. The IRS argued that the trust did not meet the immediate interest provision of the gift tax exclusion. 

The case dragged on for several years. Finally, in 1968, the courts disagreed and ruled in favor of the Crummey family.

As a result, the Crummey Trust continues to be a viable option for families wishing to make lifetime gifts to their beneficiaries while maintaining control over the assets and avoiding gift taxes. 

Advantages and Disadvantages of the Crummey Trust

Advantages

• A Crummey Trust allows for tax-free gift contributions via the annual gift tax exclusion.
• Over time, this can result in a significant tax-advantaged transfer of wealth.
• Beneficiaries have the right to withdraw money for a certain amount of time after each contribution, for some financial benefit and security.
• Beneficiaries only have access to the latest contribution.
• Grantors can retain some control over the gift contributions and instruct how assets will be managed and distributed.
• Grantors can move assets out of their taxable estate and potentially reduce any estate tax bill.

Disadvantages

• Providing beneficiaries with immediate access to sizable gifts may jeopardize the fund's ability to accumulate earnings long-term.
• A Crummey Trust can have substantial legal, setup, and administrative costs.
• The administration of a Crummey Trust requires great care and attention so as to avoid mistakes (such as failing to send out Crummey letters) that threaten its tax benefits.
• Because it's an irrevocable trust, the grantor cannot remove the assets or control them (beyond the trust terms that they established).

Some families bypass the potential problem of children withdrawing their gifts by setting certain restrictions, such as ending future gifts to recipients who withdraw funds immediately. Or, a parent might designate that a child can't access trust money until they reach the age of 25.

The Bottom Line

A Crummey Trust is an irrevocable trust that a grantor can use to reduce their taxable estate, protect assets, and transfer wealth to beneficiaries. Gift contributions made to a Crummey Trust are exempt from the annual gift tax as long as they're less than the IRS annual gift threshold and beneficiaries are informed of them.

Beneficiaries have the power to withdraw funds every time the grantor makes a contribution. This power is vital to retaining the tax-exempt status of the contributions.