Crummey Trust: Definition, Purpose, How It Works, and History

What Is a Crummey Trust?

A Crummey trust is part of an estate planning technique that can be employed to take advantage of the gift tax exclusion when transferring money or assets to another person while retaining the option to place limitations on when the recipient can access the money.

Understanding Crummey Trusts

Crummey trusts are typically used by parents to provide their children with lifetime gifts while sheltering their money from gift taxes as long as the gift's value is equal to or less than the permitted annual exclusion amount.

For calendar year 2022, that amount is $16,000 per recipient, rising to $17,000 in 2023. A Crummey trust allows a family to continue making the annual $17,000 gift while placing the money in a protected fund. The protected fund protects from gift taxes imposed by the Internal Revenue Service (IRS).

The annual gift tax exclusion usually doesn't apply to gifts made to trusts. The IRS requires the gift recipient to have a "present interest" in the gift for the exclusion to kick in. The beneficiary must be granted immediate access to the gift as long as they are not a minor under the age of 18. Many varieties of trusts provide beneficiaries with a "future interest" in the trust's assets. 

The use of a Crummey trust allows an eligible recipient to make withdrawals of the gift within a set span of time, such as within 30 or 60 days after the transfer. Beyond that point, the gift funds held in the trust fall under the stipulated withdrawal rules as set by the trust's grantor.

History of the Crummey Trust

The Crummey trust is named for Clifford Crummey, the first successful taxpayer to use this technique. After he established up a trust in this manner in 1962, the Internal Revenue Service (IRS) attempted to deny him and his family the annual gift tax exclusion. The IRS argued that the trust did not meet the immediate interest provision of the gift tax exclusion. 

The case dragged on for several years. Finally, in 1968, the courts disagreed and ruled in favor of the Crummey family.

As a result, the Crummey trust continues to be a viable option for families wishing to make lifetime gifts to their children while protecting against gift taxes. 

Disadvantages of the Crummey Trust

One potential drawback to the Crummey trust is that providing recipients, in particular minors, with immediate access to sizable gifts may jeopardize the fund's ability to accumulate earnings long-term. Some families bypass this by setting certain restrictions, such as limiting the amount or frequency of withdrawals or ending future gifts to recipients who withdraw funds immediately. 

For example, a parent can designate that a child can't access trust money until reaching the age of 25. But even if the recipient decides to tap into the trust immediately, they only have access to the most recent gift. All previous gift funds remain protected within the trust account.