This post is for people who want to reduce their estates below the Massachusetts “exemption” of $1 million, and especially for those who risk incurring the federal estate tax on estates in excess of $5 million.
You shouldn’t just give the money away, for a number of reasons, one of which is that the feds, at least, are wise to this sort of thing and a gift will incurr a gift tax.
The gift tax is a federal tax (It has no equivalent at the state level in Massachusetts.) which must be paid by the donor (the person making a gift). If the gift tax is not paid at the time of the gift, the gift will essentially be counted in the federal estate for estate tax purposes, since the gift will reduce the amount the federal estate tax exemption.
But there is a way to make a gift without incurring gift tax or “burning” your federal tax exemption. This is by using the “annual exclusion.” 26 U.S.C. 2503(b). The annual exclusion, however, applies only to present interests in property. So, if you leave $13,000 in trust for your grandson, who is 7 years old, and the trust instructs the trustee to distribute the property to the young man when he turns 30, you would not ordinarily be able to take advantage of the annual exclusion, because you have made a gift of a future interest. This is true even if the trust is structured so that, if your grandson dies before you do, the property will be included in his estate.
So, how do you make a future interest into a present one? By including in the trust “Crummey” demand powers.
Here is a typical “Crummey” power provision:
Notwithstanding anything herein contained to the contrary, if in any year a contribution is made to the trust estate, including the initial contribution funding the trust, the trustee shall promptly notify the beneficiaries (or, if a beneficiary is a minor or has been declared incompetent, his parent or guardian) of such contribution, and the beneficiary (or guardian or parent, as the case may be) shall have the right at any time within 30 days of receipt of such notice to withdraw from the trust an amount of such contribution up to the annual exclusion available to the individual making the contribution (and his or her spouse if he or she shall consent to being deemed to have made one half of such contribution) for United States Federal Gift Tax purposes with respect to such contribution, after taking into account any other gifts made by the settlor (and his or her spouse, if applicable) to such person in that year.
(from Margolis, ElderLaw Forms Manual (2010))
http://www.aspenpublishers.com/Product.asp?catalog_name=Aspen&product_id=0735536813&cookie_test=1
By providing that the trustee shall notify the beneficiary of any contribution to the trust, and giving the beneficiary the right to withdraw up to the contribution amount, the trust allows the donor to claim the annual exclusion, even if the beneficiary is a minor.
This is a very neat trick. It works well for insurance trusts, called ILITs, where the beneficiary knows that if he takes the money out, the insurance will not be purchased, and a much larger death benefit will be lost. It also works well for a beneficiary under 18, where the parent is either the donor himself, or in sympathy with what the donor is trying to do.
But, what if the beneficiary is over 18, and the money has not been used to purchase insurance, but is simply sitting there, properly invested, to be available, at the Trustee’s discretion, for things like college, a wedding, or a first house? How well do “Crummey powers” work then?
Well, it gets a bit more complicated. Once the beneficiary turns 18, he or she must have the actual right to take the money out. That right only extends to the amount of a given year’s gift, and it only has to last for a reasonable time, say, 30 days. Of course, if the beneficiary does so once, and the donor disapproves of that decision, there is no requirement that the donor make any more such gifts.
A trust with “Crummey” powers must be irrevocable, or there is no gift at all, present or future. However, each individual gift is a separate decision.
The title of this post refers to “Crummey” powers as a possible “solution in search of a problem.” A trust with “Crummey” powers is an irresistibly neat trick from the lawyer’s point of view, turning a future interest into a present one, and getting money out of the client’s estate “for free.” But, before drafting one, I would first look to see whether there was a real “problem” that crummey powers will solve. Is the client really concerned about shrinking the estate for federal tax purposes? What is the real purpose of the gift?
If the real purpose of the gift is to earmark some money for education while keeping it out of the hands of a possibly irresponsible 20-something, “Crummey” may not be the way to go.
On the other hand, if the client is really concerned about federal taxes, one needs to ask whether the client is willing, or likely, to remember to send out the required notice every year, year after year. If the administration is not done, there may be no tax benefit at all.
If the notices are not sent, it is likely that the IRS will not accept the Crummey language alone as being effective. This brings up an intriguing possibility for trusts where the donor is the trustee. The donor could make a decision whether to send out the crummey notices on a year by year basis. If the donee decided to help himself one year, the donor could go on making gifts, but not send the notices. These subsequent gifts would presumably reduce the federal estate tax exemption available to the donor’s estate. But the previous gifts would be safe, outside the donor’s estate.
As always, when you gifts are involved, the Medicaid gift trap should be considered. Estate tax planning is never a “do it yourself” proposition. Do you have a problem that “Crummey” trust powers would solve? Only your lawyer can help you be sure.
The picture above is from http://www.flickr.com/photos/skatzenell/274088169/. Thank you Sarah Katzenell. And my apologies to the Crummey family for the visual pun.
The case from which the term “Crummey powers” is derived can be found online here:.http://scholar.google.com/scholar_case?case=4218752419439875664&q=crummey&hl=en&as_sdt=40000003