A Crummey power is a special power regarding gifts in Trust. It was named for a court case of some years ago. In order for a gift in Trust to qualify for the annual gift tax exclusion, the individual recipient must have a right to withdraw the money for some certain period of time, at least 30 days. The right to take the gift from the Trust during the period of time indicated is known as the Crummey power.

How Does a Crummey Power Work?

The annual gift exclusion effectively exempts annual gifts up to $14,000 per beneficiary from the federal gift tax. For instance, if you have 3 children, you can gift $14,000 to each of them every year without incurring a gift tax. The children’s Mom can also gift $14,000 to each child. Each child would receive a total of $28,000 from you and your spouse. Your annual exclusion gift total for the year would be $84,000. This is true even if the entire gift comes from only one parent as long as both you and your spouse agree to “split” the annual exclusion gifts.

Over your lifetime, regular gifting may reduce the size of your estate. But what if you want to gift into a Trust?

The only restriction on annual exclusion gifts is that the recipient must be allowed the right of immediate use and enjoyment of the gift. If the recipient cannot enjoy or use the gift immediately, it will be considered a gift of future interest and will not qualify for the annual exclusion. Because of this restriction, you might assume that a gift into an Irrevocable Trust would not qualify for the annual exclusion. However, it is possible to qualify gifts into a Trust for the annual exclusion by using a Crummey power. Without a Crummey power, all gifts you make to your Irrevocable Trust will be subject to gift tax.

You transfer funds to an Irrevocable Trust containing a Crummey power. The Trustee must then give adequate notice to each beneficiary stating that the funds can be withdrawn. A Crummey notice should include the amount of the gift, the date the withdrawal power will lapse, and the extent of the beneficiary’s power. It should be sent to the beneficiary. If the beneficiary is a minor, the notice should be sent to his court-appointed guardian, if any, or his natural guardian.

The timeframe for withdrawal should be reasonable. A typical Crummey withdrawal power lapses 30 days after the gift is made to the Trust. Although never explicitly ruled on, this seems the shortest period of time that will pass muster with the IRS. Whether or not the beneficiaries exercise their right, the gift still qualifies for the annual gift tax exclusion. If the withdrawal right is not exercised, the Trustee may use these gifts for other purposes permitted under your Trust document, such as investing the money or making premium payments on a life insurance policy that the Trust owns. This is the most common method to fund an irrevocable insurance Trust.

Advantages of Using a Crummey Power

A Crummey power inserted in a Trust document may present the most effective means available to accomplish the estate planning objectives of:

• Taking advantage of annual exclusions
• Leveraging assets passing to heirs by using life insurance
• Keeping affected assets out of the control of immature beneficiaries

Also, by using Crummey provisions with an Irrevocable Life Insurance Trust, you can effectively leave significant amounts of liquid assets to loved ones at zero gift and estate tax cost.

The advantages of using an ILIT with a Crummey Power are:

• There is no current income of the Trust to be taxed at the compressed Trust rates.
• With ownership of the insurance policies vested in the Trust, there are no estate tax implications to either you or your beneficiaries.
• Funding the Trust with insurance policies will provide a source of instant liquidity upon your death.

The Crummey power inserted into a Trust is a tremendously powerful gift-giving strategy. It allows you to transfer assets out your estate at minimal gift tax cost while giving you the flexibility to accumulate or distribute assets to loved ones when you choose through the Trust.

A Crummey Power Example

You decide you need to purchase a $2 million insurance policy on your life to cover estate taxes. If you were to buy and own the policy, the policy proceeds would be included in your taxable estate and subject to estate taxes.

On the other hand, if you were to gift the $42,000 premium to an Irrevocable Trust that had no Crummey powers, you would have made a taxable gift and could owe a gift tax. Your other option, if available, would be to apply this gift to your Lifetime Gift Exemption of $5.49 million.

If you were to make the same $42,000 gift per year to a Trust that included Crummey powers, the Trustee would notify each beneficiary that they have a 30 day right to withdraw their 1/3^rd share of the gift. The children understand that if they do not withdraw the gift, the money will be used to pay the premium on the $2 million life insurance policy that they will ultimately inherit from the Trust.

The end result is that a $2 million life insurance policy is owned outside of your taxable estate. Plus, you made tax free annual gifts to the Trust for the premium payments without incurring any gift taxes.

Crummey powers are commonly used in Irrevocable Trusts. But for them to succeed in qualifying gifts for the annual exclusion, the rules must be followed carefully. That is, the beneficiaries must receive prompt notice that a gift has been made and be given reasonable time and opportunity to request a withdrawal. Consult your estate planner or tax advisor to learn more about this complex tool.