DEFINITION of 'Crummey Power'

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. Crummey power is often applied to contributions in an irrevocable trust; often in respect to life insurance. In order for the Crummey power to work, the gift must be stipulated as being part of the trust when it is drafted and the gift cannot exceed $12,000 annually per beneficiary of the trust (among other requirements).

BREAKING DOWN 'Crummey Power'

This is how Crummey power works: When a donor makes a contribution to the irrevocable trust, the beneficiaries must be notified that the funds can be withdrawn within a certain time period (no less than 30 days). When the beneficiary does not withdraw the funds, they go back to the trust and are then subject to the annual gift tax exclusion. The donor will usually inform the beneficiary of his or her intentions to use the Crummey power, so that the beneficiary declines to withdraw the gift when given the opportunity.

Crummey power is named after Clifford Crummey who wanted to build a trust fund for his sons, and be able to reap the yearly tax exemption benefits as well.

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