Crummey Power

Definition of Crummey Power

Crummey power is a technique that enables a person to receive a gift that is not eligible for a gift-tax exclusion and change it into a gift that is, in fact, eligible. Individuals often apply Crummey power to contributions in an irrevocable trust. In order for Crummey power to work, an individual must stipulate that the gift is part of the trust when it is drafted, and the gift amount cannot exceed $15,000 annually, per beneficiary in 2021, rising to $16,000 in 2022.

Key Takeaways

  • Crummey power allows a person to receive a gift that is not eligible for a gift-tax exclusion and then effectively transform the status of that gift into one that is eligible for a gift-tax exclusion.
  • Crummey power was first created in the 1960s when a wealthy grantor named Clifford Crummey had a strong desire to build a trust fund for his children, while still reaping the yearly tax exemption benefits.
  • For Crummey power to work, individuals must stipulate that the gift is part of the trust when it is drafted.
  • The gift amount cannot exceed the regular gift-tax exclusion figure ($16,000 per beneficiary, per year in 2022).

Understanding Crummey Power

Crummey power was named after Clifford Crummey, a wealthy grantor who, in the 1960s, wanted to build a trust fund for his children, while maintaining the ability to reap the yearly tax exemption benefits. (The Crummey trust is named for him.) When a donor makes a contribution to an irrevocable trust, the beneficiaries must be notified that the funds are able to be withdrawn within a certain time period that's no less than 30 days.

A beneficiary may decline to withdraw a gift, which allows the grantor to exercise the Crummey power instead. In this scenario, the assets would be subject to the annual gift tax exclusion. A donor will usually inform the beneficiary of their intentions to use the Crummey power.

For Crummey power to work, individuals must stipulate that the gift is part of the trust when it is drafted. Also, the gift amount cannot exceed the regular gift-tax exclusion figure ($15,000 per recipient per year in 2021; $16,000 in 2022).

Crummey Trusts

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.

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.

The annual gift tax exclusion usually doesn't apply to gifts made to trusts. However, a Crummey trust allows a family to continue making the annual gifts while placing the money in a protected fund. The protected fund protects from gift taxes imposed by the Internal Revenue Service (IRS).

Traditional life insurance trusts often contain a Crummey provision.

Crummey Power and Irrevocable Trusts

In addition to affording individuals the Crummey power option, irrevocable trusts have several additional unique features. By definition, an irrevocable trust cannot legally be modified or terminated without the beneficiary's permission. When a grantor creates an irrevocable trust, they effectively relinquish all rights of ownership to the assets.

Individuals may set up irrevocable trusts for philosophical reasons. For example, they may wish to keep a set financial policy in place, or they may wish to maintain core values intact for future generations. For example, an irrevocable trust may stipulate limited distributions to beneficiaries each year, to ensure that beneficiaries build their own sources of revenue and don't solely rely on inherited wealth. Such action promotes fiscal responsibility, while reducing the ability of an heir to squander their newly-inherited assets.

Irrevocable trusts also have several tax perks. By eliminating all incidents of ownership from estate taxes, they effectively remove the trust's assets from the grantor's taxable estate. Furthermore, irrevocable trusts can relieve a grantor of tax liability on any income the assets generate.

This sharply contrasts with revocable trusts, in which grantors can alter or cancel any provisions. During the life of the revocable trust, the grantor may receive distributions of income from the trust. While it does not offer the same tax advantages as an irrevocable trust, revocable trusts will be transferred to the beneficiaries, immediately upon a grantor's death.

Article Sources
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  1. Internal Revenue Service. "IRS provides tax inflation adjustments for tax year 2022." Accessed Jan. 1, 2022.

  2. Internal Revenue Service. "Instructions for Form 709." Accessed Jan. 1, 2022.

  3. Court of Appeals for the Ninth Circuit. "D. Clifford Crummey v. Commissioner of Internal Revenue, 397 F.2d 82 (9th Cir. 1968)." Accessed Jan. 1, 2022.

  4. Internal Revenue Service. "F. Trust Primer," pages 80-82. Accessed Jan. 1, 2022.

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