When it comes to handling your financial assets and transferring them to beneficiaries, often your children, a spouse, or long-term domestic partner, you have some choices to make for managing the distribution of these funds. Various types of trusts help you plan for the future of your loved ones, even after you’re gone. If you choose to place financial gifts in a trust, you’ll want to know how to minimize or eliminate taxes on them so your family benefits more from your estate than the IRS. This is where a Crummey trust can come in handy.
A Crummey trust is specifically designed to transfer assets, usually to minor or adult children, though anyone can be a beneficiary. The purpose of a Crummey trust is to avoid gift taxes on the bequeathed assets.
A Crummey trust works differently than other types of trusts in terms of taxation. This type of trust also differs in the transfer of assets and withdrawals of funds for beneficiaries. At the onset of creating a Crummey trust, a set window of time is established, specifying how long the beneficiary has to withdraw any assets. In some cases, a beneficiary may withdraw assets within the first month after the trust is created and funded.
This short window of withdrawal power allows them to present interest in the monetary gifts included in the trust. This is the most valuable feature of a Crummey trust, as it’s the aspect that allows you to reduce gift taxes or eliminate them when transferring financial assets to a minor child, adult child, or any other beneficiary you choose to include in the Crummey trust.
Technically, a beneficiary could withdraw funds from the trust during the initial window of time set, but that would be unlikely in the case of a minor child. If no assets are withdrawn during the period you set for the window, any monetary gifts you’ve put into the trust will remain there until a later date. According to the terms and timeline you set within the trust, the beneficiary will withdraw them in the future. It’s the responsibility of the trustee to adhere to the terms of the trust you established at its creation.
The primary advantage of including a Crummey trust in your estate planning is the benefit of how tax laws handle financial gifts in a Crummey trust. If your beneficiary refrains from withdrawing any funds from the trust during the initial withdrawal period set, funds added to the trust for them will then be exempt from taxes due to an annual gift tax exclusion.
The gift tax exclusion is limited to $15,000 per tax-paying individual. If you’re a couple who files a joint tax return, you’d be permitted to gift a combined $30,000 per child, on an annual basis, without it being included in a gift tax. However, you could still be required to file a gift tax return when preparing your taxes.
To make the gift tax exclusion rule work, you’ll need to make sure that your Crummey trust has a legitimate withdrawal period, during which your beneficiary will be allowed to withdraw funds from the trust. Withdrawals probably won’t be an issue with minor children, as you will likely set up the trust on their behalf.
In the case of adult children or other adult beneficiaries, you can specify that no other financial gifts will be added to the trust if any assets are taken out of the trust during the set withdrawal period. This can serve as an incentive to prevent beneficiaries from seeking to withdraw trust assets too soon.
While Crummey trusts are often used primarily for the transfer of wealth, they can also be helpful in college fund planning. For example, you could earmark funds in the trust to be used for college tuition only. Or you could set other conditions, such as your child having to turn a certain age or complete college before being permitted access to the trust. The advantages to Crummey trusts are that they provide you with precise control of trust assets and a timeline for distribution to your beneficiaries while also providing tax benefits.
Under the tax laws governing Crummey trusts, the gift tax exclusion applies to gifts given up to $15,000 per year per person. There’s one loophole, though, that may allow gifts in excess of $15,000 a year without triggering any gift tax under an addition to the annual gift tax exclusion. There’s a federal estate tax lifetime exclusion as well, which allows up to $11.7 million per person. Therefore, if you decide to put annual gifts in excess of $15,000, you’re permitted to deduct them from your lifetime exclusion.
Crummey Trusts aren’t suitable for everyone. For example, most people cannot annually gift beneficiaries large sums of money via a trust. However, a Crummey trust might be a good choice for you if you’ve been fortunate enough to have amassed substantial wealth over the years and are looking for a financial vehicle to hold annual gifts to your beneficiaries in a trust.
Another reason you may want to create a Crummey trust reduces the size of your estate so that you can minimize the amount of estate taxes your estate would be forced to pay at the time of your passing. This means your beneficiaries, often your closest family members, will be able to keep more of the money you worked so hard for to help them have a bright future.
If you’re near the Lake Forest, Illinois area, and need more information about Crummey trusts, planning a college fund, other forms of financial planning, and wealth management, please feel free to reach out to the accounting and consulting professionals at Pasquesi Sheppard. We’re experienced in all matters involving taxes, auditing, bookkeeping, and an array of other financial services. You can call (847) 234-5000 or fill out a contact form on our website Financial Planning & Consulting in Lake Forest to set up a consultation to discuss your financial goals and help you plan for the future.