Trustees Must Learn the Ins and Outs of Crummey Trust Administration

In order to save on potential estate taxes after death, many people choose to create estate plans that involve trusts designed to take advantage of the annual gift tax exemption. Gifts under the amount designated as the annual gift tax exemption amount for any given year are generally estate and gift tax-free. In some cases, however, the donor may not want the recipient of the gifts to have access to the funds until a certain time. A good example of this is in the case of parents who want to make gifts to children, but have concerns about giving the children access to the funds at too young an age. In these cases, a Crummey trust may be used to allow for annual tax-free gift giving while limiting the beneficiaries’ ability to access the gifts. Trustees of these trusts must be prepared to begin their trust administration work as soon as the trust is created.

Important Tips for Crummey Trust Administration

What can a trustee expect to occur during the administration of a Crummey trust? The following are ten helpful things to know about these commonly used trusts:

  1. The donor makes annual gifts to the trust. These gifts are typically made up to the amount of the annual gift tax exemption, currently $14,000.
  2. In order to ensure that the beneficiaries are viewed as having a “present interest” in these gifts, as opposed to a “future interest,” the beneficiaries are given certain rights that qualify as a “present interest.”
  3. Typically, the right that is used to make the gift qualify as a “present interest” is the right to take the money out immediately and spend it.
  4. Restrictions may be placed on this right, however. This is done through the Crummey trust. The beneficiaries are not given any rights to the income of the trust property; however, they are given the right to withdraw the amount of each gift for up to 30 days after each gift is made. This withdrawal right is treated as a “present interest” because it begins immediately after the gift is made.
  5. The trustee typically mails out a Crummey notice to inform the beneficiaries of their right to withdraw. These notices must go out to all beneficiaries. They also must state that a gift has been made to the trust, and that the beneficiary has the right to withdraw a specific dollar amount for the next 30 days. Since the gifts are typically made on an annual basis, Crummey notices must be mailed each year.
  6. If the beneficiary does not make the withdrawal within that time period, the right lapses and the money remains in the trust.
  7. The trustee then invests the money in a prudent manner.
  8. Once the withdrawal right period has passed, there is no further right for a beneficiary to access the trust funds until such time as the funds are distributed.
  9. The terms of the trust document dictate when the assets are to be distributed to the beneficiaries.
  10. Until the assets are distributed, the property remains in the trust and ideally will continue to grow.

Ensuring that the trust administration steps are properly followed is very important when dealing with this type of trust. Missteps could ultimately cause gift or estate tax issues for the creators of the trust. Fortunately, trustees do not have to navigate this process alone. An experienced trust administration attorney can guide you through the proper procedures for ensuring that the Crummey trust works as it was designed to. Your attorney may also recommend that a CPA or other tax preparer be brought on board to assist you as well.

We have helped many clients successfully fulfill their role as trustee of various types of trusts. To learn more about their experiences, we encourage you to check out our many client testimonials today.

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Scott Grossman

Scott Grossman

Attorney

The Grossman Law Firm, APC · 525 B Street, Suite 1500, San Diego, CA 92101 · (951) 523-8307