Crummey Trust

DEFINITION of 'Crummey Trust'

An estate planning technique that can be employed to take advantage of the gift tax exclusion when transferring money and/or assets to another person, while placing limitations on when the recipient can access the money. A Crummey trust allows a parent to make lifetime gifts to his or her children, free from gift or estate taxes as long as the amount is equal to or less than the permitted amount (currently $13,000 per year), while protecting the money in a trust. With the Crummey trust, the family can continue making the annual $13,000 gift while placing the money in a protected fund that the child cannot access until a specified age.

BREAKING DOWN 'Crummey Trust'

In order for the $13,000 gift tax exclusion to apply, the recipient (for example, the child) must have a "present interest" in the gift. A present interest implies that the child can spend the money immediately. The Crummey trust allows the gift to be placed in a trust in which the gift recipient has access to that particular gift for 30 days after the gift is made. In doing so, the recipient has a present interest in each gift (since he or she can access the money for 30 days). After that point, the money goes into the trust and falls under the specified withdrawal rules (for example, that the child can access the money upon reaching age 25). Even if the recipient decides to use the money, he or she only has access to the most recent gift; all the previous gifts remain protected in the trust.

The Crummey trust is named after Clifford Crummey, who was the first successful taxpayer to use this technique. After setting up a trust in this manner, the Internal Revenue Service attempted deny them of the annual gift tax exclusion; the courts ruled in favor of the Crummey family and the method continues to be a viable option for families wishing to make lifetime gifts to their children to save on estate taxes.

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