What it means
In the United States, a person can give a certain amount each year to any individual without gift tax, known as the annual exclusion. The exclusion generally applies only to gifts the recipient can use immediately.
Gifts to a trust that the beneficiary cannot touch for years normally do not qualify. A Crummey power solves this problem.
Each time a gift is made to the trust, the beneficiary receives a temporary right to withdraw it, often for 30 days or so. Because the right is real, the gift is treated as a present interest, and the annual exclusion can apply, even if the beneficiary chooses not to withdraw anything.
In practice, the trustee sends a written notice to each beneficiary after each gift, telling them of the right and the deadline. Most beneficiaries do not withdraw the money, which then stays in the trust to be used for the purposes the donor intended.
The paper trail matters, since the tax authority may challenge arrangements where notices were never sent. Crummey powers are common in trusts that hold life insurance.
The donor makes yearly gifts to the trust, the trustee uses the money to pay premiums, and the policy proceeds eventually pass to the family outside the donor's taxable estate. There are important pitfalls.
A beneficiary who lets the withdrawal right lapse may be treated as making a gift themselves if the amount is above certain limits, and the rules are technical. Anyone considering such a trust should take advice from a specialist lawyer or tax adviser, and rules and amounts vary and change over time.
In practice
Real-world examples.
Example
A grandfather wants to put money aside for his three grandchildren. He gives each child's trust a yearly gift, and the trustee notifies each beneficiary of their right to withdraw, which lets the gifts use the annual exclusion. The grandfather receives copies of the notices, which prove that the process was followed.
Example
A couple sets up a trust to own a life insurance policy. Each year they give the trust enough money to pay the premium, and the trustee sends notices to the children, who have a short window to withdraw but do not. Because the policy is owned by the trust, the proceeds are intended to pass to the family without adding to the couple's taxable estate.
Example
A business owner makes annual gifts of company shares to a family trust. The trustee records each notice and the date it was sent, so the documents are ready if the tax authority asks. Their adviser reviews the file every year to confirm the gifts stay within the amounts that qualify under the rules.
Case study
Seen in the real world.
Whitmore Family Trust is a fictional arrangement, and this case is illustrative only. A founder wanted to pass wealth to her two children over time without losing most of it in gift or estate tax.
Her lawyer set up a trust with Crummey powers. Each year she gave the trust a gift within the annual exclusion for each child, and the trustee sent written notices giving each child 30 days to withdraw the money.
Neither child withdrew, and the money was used to pay premiums on a life policy held by the trust. Years later the trustee noted that the arrangement had worked because the paperwork had been kept up to date every year, and not just at the start. The lawyer later updated the trust document to clarify the notice process, so that a successor trustee would be able to follow the same routine.
Watch out
Common mistakes.
- Failing to send notices to beneficiaries, which can undermine the claim that the gift was a present interest. Keep copies of every notice, along with proof of delivery and the date.
- Assuming the rules are the same in every country, when this is mainly a feature of US tax law. Anyone outside the United States should ask a local adviser about similar arrangements in their own country.
- Ignoring the tax effect of lapsing withdrawal rights, which can create gifts by the beneficiary above certain limits. The technical details of lapses are a common source of unintended tax results.
Questions
People also ask.
Why is it called a Crummey power?
It is named after a US court case in which this type of withdrawal right was upheld. The case established that the right to withdraw is enough to make a gift a present interest, even if the beneficiary never uses it.
How long is the withdrawal window?
It is set in the trust document and is often around 30 days, though the length can vary. A shorter period may be challenged, so the length should be set carefully with legal advice.
Do I need professional advice?
Yes, because the rules are technical, the paperwork must be precise and tax limits change over time. A specialist can also advise on how the trust fits with the rest of your estate plan and your family's needs.
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