Sometimes, the old ways are best.
Crummey Trusts—named after D. Clifford Crummey
who won a fight with the Internal Revenue Service in
the 1960s—are designed to protect life insurance
from federal estate taxes.
Many advisors are saying that this strategy makes a
lot of sense right now, even in this time of high
exemptions for estate and gift taxes, according to the
Wall Street Journal (http://tinyurl.com/7jynlmn).
Despite the fact that Congress raised the lifetime
threshold for tax-free giving from $1 million last
year, the ceiling could fall back down again in 2013,
or the government could decide to “claw back” gift
and estate tax savings from this year.
Crummey Trusts 101
Crummey Trusts are best used for making gifts to
minors, such as when a parent is giving money to a
child who isn’t ready to handle a large sum.
Grandparents often use them to pass money to grown
children or fund a college savings 529 plan.
An estate planning attorney sets up a Crummey Trust
to buy a life insurance policy for your client and
funds the premiums with annual gifts.
Each year, your client can give unlimited separate
gifts of up to $13,000 to as many people as he wants.
This gets the money out of your client’s estate and
avoids triggering the gift tax. Since the Trust owns
the policy, the death benefit goes to the Trust,
shielding it from estate taxes.
The benefits of a Crummey Trust can be written into
other kinds of planning strategies, such as a Dynasty
Trust and a Generation-Skipping Trust, simply by
adding withdrawal powers.
Down to the Letter
There is one crucial aspect of the Crummey Trust that
must be followed for this strategy to work.
The trustee must send out Crummey Letters each
year informing beneficiaries that they can withdraw
the gifted amount during a window of time, say 30
days. Most beneficiaries leave the money in the
Trust. However, the IRS considers it a tax-free gift
only if an heir has the right to take it in the short
term; the Crummey Letter establishes this right.
It’s easy to overlook the importance of sending out
these letters on time. While the trustee is often a
family member or friend of the deceased, we advise
clients to hire a professional, such as an accountant or
our firm, to send out the letters each year to ensure
every requirement has been met.
To get more information regarding this or any related topic, please visit our website www.TEPLG.com or call us at 630-871-8778.