When a loved one creates an irrevocable trust, the trust agreement may include some form of withdrawal rights for certain beneficiaries. This is done in order to allow the creator of the trust to make gifts or contributions to the trust while avoiding gift tax liabilities. As a result, the creator of the trust can take advantage of the annual gift tax exclusion amount. Giving the beneficiaries a right to withdraw a portion of the trust property qualifies the contribution as a gift in the eyes of the IRS. In order for this strategy to be effective, however, the trustee must provide the beneficiary with notice of the right to withdraw. This notice is known as a Crummey notice.
Tips for Mailing Out Crummey Notices During Trust Administration
A trustee carries a significant amount of responsibility when it comes to sending out Crummey notices. The following are helpful tips to guide you through this process:
- Carefully review the terms of the trust. Often, the trust agreement will provide some amount of instruction regarding contributions and beneficiary withdrawal rights. Many trust agreements provide for several different methods of communicating a withdrawal right to a beneficiary. The trustee must closely follow these instructions. If a trustee fails to follow outlined instructions it maybe deemed to violate the terms of the trust agreement. As a result, the trustee could be held liable to the beneficiaries.
- Send the beneficiary written, timely notice of the right to withdraw a portion of the contribution made to the trust. After the contribution is made, notice should be made promptly.
- Consider sending the notice via certified mail with return receipt requested in order to create firm proof that the notice was sent to the beneficiary. Another possible option is to send the notices via email and request confirmation of receipt by replying to the e-mail.
- Indicate the amount that is available for withdrawal.
- State the amount of time in which the beneficiary has to make a decision regarding a withdrawal. After that time, the withdrawal right will have lapsed. It is important to allow for at least 30 days before the right lapses.
- The available amount for withdrawal should be capped. However, being capped does not exclude the annual gift tax exclusion amount and currently this is $14,000 annually.
- If the trust agreement calls for it, indicate in the letter that the right to withdraw any amount in excess of the greater of either $5,000 or 5% of the value of the assets out of which the withdrawal right could be satisfied will not lapse. Instead, the right continues to exist until a later year. This is done in order to avoid unintended gift tax consequences for the beneficiary.
- Do not make any statement in the letter that references an unwritten or implied agreement between the creator of the trust and the beneficiary that the beneficiary will not exercise his or her withdrawal right. This could create undesirable tax consequences if the IRS reviews the letter or the transaction.
- During the first year of the trust’s administration, consider enclosing copies of the relevant trust agreement sections. This should include sections pertaining to gifts and withdrawal rights.
- If the beneficiary is a minor, send the letter to the beneficiary’s legal guardian on the child’s behalf.
- If your attorney recommends it, request that the beneficiary or the beneficiary’s guardian sign and return an acknowledgement statement. The acknowledgement statement would confirm that they received and read the notice of the right of withdrawal.
- Request in the letter or notice that the beneficiary notify the trustee if he or she wishes to exercise the withdrawal right.
Fortunately, trustees are entitled to seek guidance from a legal professional. This includes Crummey notices and other obligations relating to trust administration. We encourage you to learn more by viewing our many client testimonials today.
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