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 one that is 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 the gift amount cannot exceed $12,000 annually per beneficiary.

BREAKING DOWN 'Crummey Power'

Crummey power was named after Clifford Crummey, a wealthy grantor who wanted to build a trust fund for his children, as well as be able to reap the yearly tax exemption benefits.

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a donor makes a contribution to an irrevocable trust, the beneficiaries must be notified that the funds are able to be withdrawn within a certain time period (no less than 30 days). Beneficiaries can 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 his or her intentions to use the Crummey power.

Crummey Power and Irrevocable Trusts

In addition to affording the Crummey power option, irrevocable trusts have additional unique features. By definition an irrevocable trust can't be modified or terminated without the beneficiary's permission. When a grantor creates an irrevocable trust, he or she transfers all rights of ownership to the assets. Individuals may set up irrevocable trusts for philosophical reasons, wishing to keep a set financial policy in place or maintain core values intact for generations to come. 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 rely on inherited wealth alone.

However, irrevocable trusts also have several estate and tax perks. With regards to estate taxes, irrevocable trusts remove all incidents of ownership from estate taxes, effectively removing the trust's assets from the grantor's taxable estate. In addition it can relieve a grantor of tax liability on any income the assets generate.

This is contrast with a revocable trust, in which the grantor can alter or cancel any provisions. During the life of the trust, the grantor may receive distributions of income from the trust. While it does not offer the same tax advantages as an irrevocable trust (it must be included in the grantor’s taxable estate), a revocable trust will be transferred to the beneficiary(ies) immediately upon death.

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