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 $12,000 annually, per beneficiary.
Breaking Down 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. 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a donor makes a contribution to an irrevocable trust, the beneficiaries must be notified that the funds are able to be withdrawn within a certain time period that's no less than 30 days.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 his or her intentions to use the Crummey power.
KEY TAKEAWAYS [PLEASE PLACE KEY TAKEAWAYS IN PROPER CALLOUT BOX]
--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 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 $12,000 per beneficiary, per year.
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, he or she transfers 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 his of her 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 revocable trust, where grantors 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, revocable trusts will be transferred to the beneficiaries, immediately upon a grantor's death.
[Important: Traditional life insurance trusts often contain a Crummey provision.]