CRUMMEY TRUSTS

·         What is a Crummey Trust?

Generally speaking, monetary gifts to minors are subject to parental or guardian control until the minor’s age of majority.  In order to delay the transfer of control to the child until after the age of 18, the funds must be placed in trust.  However, the annual gift exclusion ($13,000 per individual and $26,000 per married couple as of 2012) from gift tax is only applied to gifts of which the minor has a current interest.  Normally, a gift into a trust that comes under control of the beneficiary at a future date does not constitute a current interest and is not taxable.

A Crummey Trust offers the beneficiary a window of time, usually 30 days, to take immediate control of the gift in the trust.  The amount the beneficiary can take control of only applies to the current gift – an amount no greater than the annual exclusion amount – not the entire trust.  If the recipient fails to withdraw the gift during the 30 day window, the gift becomes part of the trust, and is subject to the conditions of the trust.   However, since the recipient had the opportunity to receive the funds outside of the trust, the gift is deemed to be a current interest, subjecting it to the annual gift tax exclusion.

The expectation by the minor of continued future annual gifts under the trust (or the expectation of the withholding of such future gifts if the minor withdraws the funds from the trust) may motivate the recipient minor to leave the funds in the trust and not withdraw them.

·         What purpose does a Crummey Trust serve?

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

For illustrative purposes, the following hypothetical is helpful:

Cliff is a wealthy doctor who would like to gift money to his teen aged children, Theo and Denise.  Rather than give the money to his children outright, which would be considered imprudent given their teenager immaturity, Cliff 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.  Cliff appoints Clair to become the trustee of his children’s' Crummey Trusts by giving her $13,000 to hold in trust for Theo and $13,000 to hold in trust for Denise. Each year thereafter, Cliff gives Clair $13,000 for Theo's trust and $13,000 for Denise's trust. By gifting the money through a Crummey Trust, Cliff avoids having to pay gift tax for these contributions. Also, Cliff does not have to worry about his children quickly frittering away the money because the trust will restrict when distributions are made.

·         Who is the intended beneficiary of a Crummey Trust?

Minor children are the intended beneficiary of a Crummey Trust.

·         Are there ongoing requirements to a Crummey Trust?

Yes. Each time someone gifts money 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 period of time the mirror has the power to withdraw, although the IRS has allowed the annual exclusion for periods as short as 15 days.

For explanation purposes, presume that on March 1, 2012 Cliff donates $13,000 to each child's Crummey Trust. Thereafter, Clair as the trustee gives notice to Theo and Denise 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 Cliff from ever donating money again to the child's Crummey Trust. Regardless, once those 30 days have elapsed, namely come April 1, 2012, the $13,000 for each child becomes the property of each child’s respective Crummey Trust.

·         Is a Crummey Trust irrevocable?

Yes. A Crummey Trust is irrevocable. Thus, once a person creates a Crummey Trust, they cannot later revoke it. This is an exception to the rule that most trusts written in California referred to as "living trusts" can be revoked.

·         How much does it cost to write a Crummey Trust?

There is no mandatory minimum or maximum attorney fee to draft a Crummey Trust. However, if the fee is over $2,500, then you are probably being overcharged. Conversely, if the attorney fee is under $500, then your attorney probably has no idea what he or she is doing.

·         In light of the attorney fee, can you write your 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 a lay person should attempt to prepare. In fact, few legal documents should ever be prepared without the assistance of an attorney.