Introduction to Crummey Trusts
When it comes to managing family wealth and working towards a financially secure, multi-generational future, high-net-worth individuals face unique challenges. One powerful but little-known tool for overcoming those challenges is none other than the Crummey Trust, a kind of irrevocable trust.
But what exactly is so unique about Crummey Trusts, and why are they significant for estate planning purposes? In this blog post, we’ll explore the hidden history and inner workings of Crummey Trusts, and we’ll focus on four key tax benefits that can help you optimize your wealth management strategy.
Whether you’re looking to reduce your income tax, take advantage of gift tax exclusions, or minimize estate taxes, Crummey Trusts could represent a priceless avenue for sound financial planning in your family.
Rev. D. Clifford Crummey: A Humble American Hero
There aren’t many people who can say that they’ve fought the IRS for over six years and won. There are even fewer who have won a legal victory that others can use to meaningfully shield their finances from government overreach. The late Rev. D. Clifford Crummey is one such individual.
In D. Clifford Crummey et al., Petitioners v. Commissioner of Internal Revenue, Respondent, 397 F.2d 82 (9th Cir. 1968), Rev. Crummey stood up to the IRS and came out victorious for his family and for all other Americans who wanted to provide for their children through the irrevocable trust structure now named in his honor.
Digging deeper into the late Methodist Pastor’s life, it was clear that he wasn’t just in it for himself, either: in his role as a trustee for San Francisco’s Gilde Memorial United Methodist Church, he helped institute nationally-recognised programs for America’s poor and homeless populations.
His legacy, in other words, wasn’t just that he cared for his flesh-and-blood children, and wanted to provide for them through a Crummey Trust, but that he cared for many others who needed help in our great country. He set an example that we would be wise to follow as we learn about the legal instrument he paved the way for…
The Tax Advantages of Crummey Trusts
1. Gift Tax Exclusions
Perhaps the most significant tax advantage of Crummey Trusts is the way you can use them to effectively make the most of your annual gift tax exclusions. As of 2024, the IRS allows donors to gift $18,000 annually, per individual beneficiary, without incurring gift taxes — which could also mean a joint total of $36,000 gifted by a couple to an individual.
A Crummey Trust is a vehicle that allows you to take full advantage of these exclusions. If, say, you wanted more than one of your children to be beneficiaries in your Crummey Trust, they would each be able to receive $18,000 (or $36,000 if both you and your spouse contribute) — all without anyone having to file a gift tax return.
When you make an annual contribution to a Crummey Trust, the beneficiaries must be given notice of this contribution and granted a limited period (e.g. 30 days) to withdraw it for their benefit. This withdrawal right is known as the “Crummey power.”
The mere existence of the Crummey power qualifies the gift for the annual gift tax exclusion, even if the beneficiary doesn’t actually withdraw anything, as the power to withdraw gives beneficiaries something called a “present interest” in the funds. If, for whatever reason, your beneficiaries allow their power to lapse, the funds remain in the trust and will be treated however the trust’s other provisions dictate.
Note, however, that there can be no obligation or communication to the beneficiaries by the donors (or indeed the wording of the trust) that they should leave the funds untouched: the IRS will rule against the gift tax exclusion in such a case, as this de facto negates the beneficiaries’ “present interest” (i.e. if it can be proven that they never intended to exercise their Crummey power).
All of that being said, high net worth families could conceivably use Crummey Trusts to systematically contribute funds each year, transferring significant wealth to their intended beneficiaries without triggering gift taxes and even, potentially, allowing those assets to appreciate over time (again, acknowledging the “present interest” requirement).
2. Income Tax Reduction
High-income earners often seek ways to shelter a portion of their earnings from taxation, so it’s also notable that the second of the main benefits of a Crummey Trust is its potential to reduce your income tax liability (as the trust’s grantor).
The basic idea here is that, by transferring income-generating assets into a Crummey Trust, you can shift the tax burden out of your taxable estate and into the trust itself. This is particularly advantageous when the trust beneficiaries (typically, your children) are in lower tax brackets than you, the grantor.
Let’s, for example, suppose that you transfer dividend-paying stocks into a Crummey Trust. The dividends placed in the trust can be distributed to beneficiaries, who would then report the income on their tax returns.
If your beneficiaries are children aged 18 or under, or other family members in lower tax brackets, then your collective, overall tax liability is reduced. This strategy ensures that more of your hard-earned money stays within the family, rather than going to the IRS.
3. Estate Tax Minimization
We alluded to this in the second Crummey Trust tax secret above, but we’ll spell it out here: these trusts can provide an effective means to minimize your estate taxes while maintaining some level of control over your assets (through the terms of the trust, which you dictate) throughout your lifetime.
By removing these assets from your taxable estate and placing them in a Crummey Trust, you can consistently and significantly reduce the amount of your estate that is subject to taxation. This can be a very helpful way to preserve and pass on your financial legacy for future generations.
If, for instance, you decide to establish a Crummey Trust and contribute assets over several years, these assets can grow in the trust, outside of your estate. When you pass away, the value of the trust’s assets will not be included in your estate, potentially saving millions in estate taxes.
4. Values-Based Gifting
As with any other other trust, you, as the trust donor, get to decide the terms by which the funds will be distributed (as long as they comply with standard Crummey Trust IRS doctrine). What that means in practice is that you could actively follow in Rev. Crummey’s philanthropic footsteps to provide for your children in a values-based way.
You could, for example, use your Crummey Trust as a bespoke alternative to a standard 529 fund (i.e. to provide for their tertiary education needs), or you could get even more creative, and use the trust to finance your children’s charitable endeavours…
In the the latter instance, you could write terms into the trust document specifying that the funds can be withdrawn only as an allowance for your children’s relief and mission trips, or as a means to fund other supplies they might need to champion meaningful causes (like Rev. Crummey’s initiatives for the homeless). What better way could there be to honor his legacy?
How to Implement a Crummey Trust
Establishing the Trust
Setting up a Crummey Trust involves several non-negotiable steps. First, you’ll need to work with an experienced attorney to draft the trust documents. These legal documents outline the terms of the trust, including the beneficiaries, trustee, and the specific Crummey powers granted to the beneficiaries. It’s crucial to ensure that the language in the trust complies with IRS regulations to maximize the tax benefits.
Once the trust documents are in place, you’ll need to fund the trust. This involves transferring assets, such as cash, stocks, or real estate, into the trust. Each year, you can make additional contributions, in order to take advantage of the annual gift tax exclusions.
Making Annual Contributions
If you really want to benefit from the annual gift tax exclusions and you’ve chosen a Crummey Trust as your tool of choice, it’s important that you make regular contributions to it. As we alluded to earlier, each time you contribute, your beneficiaries must be given written notice of their right to withdraw the contribution. This notice is a critical component of the Crummey Trust’s compliance with IRS regulations.
Your beneficiaries typically have a limited window of time, usually 30 days, to exercise their withdrawal rights. After this period, the contributions remain in the trust and continue to grow without being subject to taxation. Keeping meticulous records of these contributions and notices is vital to ensure the trust remains in good standing with the IRS.
Common Mistakes to Avoid
Improper Notice Procedures
One common mistake when managing a Crummey Trust is failing to provide proper notice to your beneficiaries. The IRS requires that beneficiaries receive written notice of their withdrawal rights for each contribution. Neglecting this step can jeopardize all of the trust’s tax advantages and even lead to penalties. To avoid this scenario, we recommend you establish a systematic process for issuing and documenting notices.
Funding Irregularities
Another critical error is inconsistent funding of the trust — if the point of the trust is to maximize the gift exclusion. In that case, regular, annual contributions are essential for building substantial trust assets over time. Skipping contributions or failing to adhere to a consistent schedule could reduce your trust’s effectiveness. To summarize: developing a long-term funding plan and sticking to it is crucial for your Crummey Trust’s success.
Overlooking Professional Advisors
When you consider how Crummey Trusts came to be — through the quietly heroic efforts of Rev. Crummey and his attorneys — it should come as no surprise that the IRS would do everything in their power to make life complicated for the next person trying to take advantage of this ‘tax secret.’
Establishing and managing a Crummey Trust involves complex legal and tax considerations, so attempting to handle the process without professional guidance could lead to costly mistakes further down the line.
To avoid those mistakes, we recommend collaborating with experienced attorneys and certified financial advisors who specialize in estate planning and trust management. Their expertise can help you navigate the legal intricacies and ensure compliance with all IRS regulations.
Future Considerations
Adapting to Tax Law Changes
Tax laws are subject to change, and staying informed about these changes is vital for maximizing the benefits of a Crummey Trust. We recommend periodically reviewing your trust’s structure and consulting regularly with your advisors to ensure it remains aligned with current regulations.
For instance, if you want to use a Crummey Trust to make the most of your annual gift tax exemption, you should double check exactly what that is at the beginning of each new tax year, as the IRS typically increases that amount each year, to adjust for inflation. Adapting your strategy to evolving tax quirks like these will help you continue reaping the rewards of your trust.
Summary Thoughts
Crummey Trusts offer high-net-worth individuals a powerful tool for tax-efficient wealth management. By understanding the tax advantages, implementing the trust correctly, avoiding some common pitfalls, and learning from Rev. Crummey’s inspirational example, you can maximize the benefits for your immediate family and future generations.
If you’re ready to explore the potential of Crummey Trusts in your financial planning, or you’re interested in other creative ways to manage your financial affairs, Iron Point Financial’s team of experienced advisors is here to help. Contact us today to schedule a consultation and discover how we can assist you in achieving your wealth management goals.
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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
