Q: I have been reading about trusts and came across something called a crummey trust. What is it and why would anyone want one? It just sounds like it just makes a trust more complicated.
A: There really isn't a crummey trust. Trusts that are referred to as crummey trusts are just irrevocable trusts that have a provision called a crummey power. The term "crummey" comes from a celebrated tax court case from 1968, known as Crummey vs. Commissioner.
As most of you know, you can make annual gifts to any individual of up to $13,000 without having to report it to the IRS. The $13,000 is often referred to as the annual excludable amount or the annual exclusion. The process is easy: You write out a check to Bobby and he immediately runs to the bank, pushing little school children out of the way to cash it. From a tax standpoint, the gift is completed because Bobby has immediate access to it. That access is known as a present interest and it must be there in order for the gift to be completed. No access, no completed gift.
But what if you don't want Bobby to really have access to the gift? For example, rather than giving Bobby the money, you put the money in an irrevocable trust for Bobby's benefit. Bobby doesn't have immediate access to the gift because it went to a trust rather than to him. Without that immediate access, Bobby doesn't have a present interest and the gift does not qualify for the annual exclusion. Since the gift wasn't completed, it is not a gift at all and it is still in your taxable estate and is therefore subject to death taxation when you pass.
What a crummey power does is give access to the gift but only for a limited time. That limited time is enough to complete the gift so that it qualifies for the annual exclusion. The classic example is a trust that allows a beneficiary 30 days to demand the trustee turn over gifts made to it.
After 30 days, the demand right lapses. If the beneficiary fails to make the demand on the trustee within that time limit, the funds remain in the trust and are subject to its terms and restrictions. That limited demand right is the crummey power.
The most common place you find crummey powers are in irrevocable life insurance trusts, known as an ILITs. The way it works is mom makes a gift to the ILIT.
Trustee notifies son that he has 30 days to demand the gift. Son doesn't make demand and the trustee uses the funds to pay a premium on an insurance policy on mom's life. Mom dies and the policy pays to the trust to be distributed according to its terms. Since the policy is outside of mom's estate, it is not subject to any death taxes mom's taxable estate is reduced due to the gifts and insurance proceeds benefit Bobby tax-free.
Crummey powers are complicated and formalities must be followed carefully. However, for people that make sizeable gifts to their loved ones, they can be extremely useful.
Opinions expressed solely are those of the writer. Christopher W. Yugo is a member of the Indiana Bar and a vice president and senior trust Officer for First National Bank's Trust Department. Address questions to Yugo in care of The Times, 601 W. 45th Ave., Munster, IN, 46321. Yugo's information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant or estate-planning specialist.
