Crummey Trust: A Safe Way to Give Financial Gifts to Minors

Rolls of dollar bills tied together with red ribbon.Many parents and grandparents want to pass their wealth to their children while they are still alive. Gifts to children or grandchildren can be a good way to reduce a taxable estate.

At the same time, you can control when the minor will receive access to the funds you are gifting. Not to mention this can aid you in taking advantage of the gift tax exclusion for a given fiscal year. One way to accomplish these goals is using a Crummey Trust.

What Is a Crummey Trust?
A Crummey Trust is a type of trust intended to benefit minors. The names for these trusts come from the first person to create this kind of trust in the late 1960s, D. Clifford Crummey.

A Crummey Trust allows you to give a minor up to $18,000 a year (in 2024) without incurring a gift tax or reducing one’s lifetime gift tax exemption amount. It also prevents a scenario in which the minor, who may be a child or grandchild, gets the money outright. The idea is to keep the funds in trust until the child is old enough to manage them responsibly.

Remind Me, What Is a Gift Tax?
Perhaps you would like to gift someone a significant amount of money or other valuable property. Imagine you’re ready to give your grandchildren their inheritance. Depending on the value of such a gift, the Internal Revenue Service (IRS) may require you to pay a tax on it.

As mentioned above, in 2024, you can give up to $18,000 to any one recipient without incurring the gift tax. (If you and your spouse elect to split the gifts, together you can give up to $36,000 to an individual that year.) Any more than that, and you must file a gift tax return.

You may be surprised to learn that the federal gift tax exclusion in 1963 was $3,000. The current 2024 federal gift tax exclusion is $18,000. This is not a particularly substantial change, considering that more than six decades have passed.

Crummey Trusts vs. Custodial Accounts
You may have heard of custodial accounts for children, where the parent or someone else retains custody of the child’s account. For most of these accounts, the child has the right to access the money when they reach the age of majority. (depending on the state and/or financial institution, this age is generally 18 or 21). You may not, however, want an 18-year-old getting a large sum of money all at once when you have worked hard to save for them.

In contrast, a Crummey Trust allows a person to save money for the benefit of a child in a trust. With this trust, you can decide:

when the child will receive the money,
how the money is managed,
how much they’ll receive, and for what purposes, and
other details related to receipt of the funds.
With Crummey Trusts, you should be aware of certain conditions. The IRS has set forth four main criteria a trust must meet to qualify as a Crummey Trust. It also must meet these criteria to qualify for the gift tax exclusion in a particular tax year:

First, a trust must convey a “present interest” in a gift to a beneficiary. If a beneficiary has a present interest gift, it means they can use, possess, or enjoy the gift (or income from it) right away. They must not face any restrictions in doing so.

This is because a transfer of a future interest in property does not qualify for the gift tax exclusion. Only a transfer of a present interest of property qualifies.

The trust also must notify the beneficiary of their right to make a withdrawal from the trust. That said, the trust’s terms can limit the duration of this right of withdrawal to a certain period, such as 30 days. (The beneficiary does not have to exercise this right.)

After receiving notification, the beneficiary must have sufficient time to exercise their right to withdraw the funds.

A beneficiary can choose to exercise their right to withdraw. If they do, they must have immediate and unrestricted access to the funds deposited into the trust.

The trust’s creator (grantor) cannot set up any official agreement preventing the beneficiary from exercising their right to withdraw. However, once the temporary right to withdraw the funds expires and no withdrawal has been made, the beneficiary can no longer withdraw the money, and it becomes a part of the trust.
The trust funds can be managed, accrue interest, and hopefully grow to even more than the initial deposit once they become available to a beneficiary later on in life.

Other Features of Crummey Trusts
Several other features of a Crummey Trust may be attractive to a grantor.

For example, they can decide ahead of time how the beneficiary can spend the trust funds. The grantor may outline terms that limit the beneficiary from withdrawing funds only for certain purposes, such as their education, health, maintenance, or support. The terms of the trust can also guide investment of the funds.

Additionally, the beneficiary does not have to withdraw funds from the trust by a certain age. With other kinds of trusts, the law may require a beneficiary to withdraw their trust funds once they reach age 18 or 21.

Potential Downsides of a Crummey Trust
However, there are also practical realities to consider. A Crummey Trust requires good record-keeping regarding gifts made and notices issued to beneficiaries. This can be a deterrent to some.

In addition, as beneficiaries mature, they’ll likely become able to review and understand notices regarding their withdrawal rights. If they wish to exercise this power, this may make grandparents or gift givers hesitant to make further gifts to the trust.

Finally, although distributions are not required, the income made by the trust can be a tax liability of the beneficiary because they are generally treated as grantor trusts for tax purposes. However, this may not be a significant issue for many minors, as they are likely to be in a low-income tax bracket.

Consult With Your Estate Planning Attorney
Before setting up any type of trust, be sure to talk to your estate planning attorney about what is right in your situation.

Contact us
Questions? Contact us at Elise Lampert, Attorney at Law


Elise Lampert, Esq.
Law Office of Elise Lampert
9595 Wilshire Blvd. | Suite 900 | Beverly Hills , CA 90212
Phone: (818) 905-0601 / Email: elise@elampertlaw.com
https://www.eliselampert.com

 

A Seniors Guide to Estate Planning

Most older adults acknowledge that estate planning is essential. Yet, nearly half of Americans age 55 or older do not have a will, and even fewer have designated powers of attorney, a living will, or health care directives.

These legal documents help guide your representatives to provide the end-of-life wishes you seek. Estate planning also reduces the burden your loved ones face and lessens the potential for conflict among your family members after you are gone.

Whether you own a little or a great deal, every senior should have an estate plan. Your estate comprises your home, real estate, vehicles, businesses, bank accounts, life insurance, personal possessions, and any debt you may owe. The goals of your estate plan include:

• Establishing who will receive your assets upon your death
• Setting up a durable power of attorney
• Selecting a trusted representative to make health care decisions on your behalf if you become unable to manage your own affairs due to illness or injury
• Creating a will and trust
• Minimizing estate taxes
• Appointing your estate executor or representative
• Providing peace of mind to you and your loved ones

Four basic elements of an estate plan can help you achieve these goals.

Creating Your Will

This legal document, called a testamentary will, transfers your estate, after you die, to the individuals or charities you name. Naming your executor or personal representative is another function of your will. This individual will ensure your wishes are carried out. Many older adults choose their most responsible adult child for this role.

Advise the person you choose to manage their expectations and advise your family of what to expect in your will. This way, you can address questions they may have and stave off family confrontations after you are gone.

Your will needs to include the following:

• your named executor,
• a list of individuals or charities you wish to receive your assets,
• a list of significant assets to leave to heirs, and
• your debts (mortgages, car loans, credit card debts, etc.).

Be aware that if you have substantial assets in probate court, the process can wind up costing 10 percent of your estate value. (Probate is the legal proceeding where the court oversees the distribution of your assets.) This can add stress to your executor's role, as well as increase the time it takes for your family members to receive their inheritance.

You may wish to establish a trust; you can do so by working with an elder law attorney or estate planning attorney. Creating a trust can minimize taxes, restrict asset distribution, and also bypass probate. These trusts are usually a revocable or irrevocable living trust, special needs trust, or spendthrift trust. Your attorney can identify the trust type that best meets your needs.

Your Living Will and Durable Health Care Power of Attorney

A living will outlines your choices regarding end-of-life treatments and will come into play while you are still alive but unable to communicate health care decisions. Similarly, a health care power of attorney's decision-making will only be active when you become unable to communicate your wishes. The person you name as your durable health care power of attorney is typically a caregiver or family member who inspires the utmost trust.

Here are some general issues to consider when creating a living will:

• Medications you are willing or unwilling to have administered to you
• Permission for a feeding tube if you are unable to eat
• Permission to be on life support and, if so, for how long
• Willingness to accept palliative care at the end of life
• Having a do-not-resuscitate order or DNR
• Your decision about being an organ donor

If you have both documents, a living will trumps your health care proxy. Many older adults prefer to forgo a living will. They instead opt to rely on their health care proxy to make medical decisions on their behalf in the event that they become unable to communicate their wishes for treatment and life-saving measures. Whatever you choose, it is important to inform your loved ones of your health care preferences.

Durable Financial Power of Attorney

Much like a health care power of attorney, a financial power of attorney becomes active when you can no longer make financial decisions. The person you designate will manage your finances on your behalf. To alleviate excessive burden, consider appointing a different individual than your health care power of attorney. However, note that it is legally permissible to name the same person.

Your financial power of attorney should be highly trustworthy and financially stable. When selecting an individual in your life to fulfill this role, you may consider someone who not only lives near you, but is also willing and capable of serving. The individual must be financially responsible, trustworthy, and able to act in your best interests. Finally, this person should be proactive and assertive in protecting your finances.

While these documents represent the basics of an estate plan, your situation may require far more detail and nuanced expertise that an elder law attorney can provide if they do not also offer estate planning. Begin with a checklist including:

• A list of your assets and debts
• Assemble important supporting documents
• Choose candidates for the executor (personal representative) and powers of attorney
• Draft an outline of estate planning documents as listed above
• Talk with your family about your goals and wishes

Connect With Your Estate Planning Attorney

When you accomplish these tasks, your attorney can review your efforts and put your plan into legal action. You will save time and money by being organized and having a basic understanding the estate planning process before meeting with them.

Once all of your estate planning documents are complete, you'll have a sense of peace knowing you have a solid plan that best protects you and your loved ones.

Contact us

Questions? Contact us at Elise Lampert, Attorney at Law

   

Elise Lampert, Esq.

Law Office of Elise Lampert

9595 Wilshire Blvd. | Suite 900 | Beverly Hills , CA 90212

Phone: (818) 905-0601 / Email: elise@elampertlaw.com

https://www.eliselampert.com