Are you concerned about giving significant amounts of cash to your children or grandchildren and not knowing how they will use it? A Crummey trust may be the answer to your worries.
With a custodial account, you can give away up to the gift tax annual exclusion amount each year to an unlimited number of donees, free of gift and generation-skipping transfer tax.
Yet, few parents wish their children (or grandchildren) to receive significant amounts of cash at age 18 or 21.
What is a Crummey Trust?
Fortunately, there is a special kind of trust that avoids this problem. It’s called a Crummey trust, after a court case that paved the way for the use of this kind of trust.
With a Crummey trust, the property can remain in trust for as long as you wish without forfeiting the gift tax annual exclusion.
A Crummey Trust enables you to:
- Transfer property to remain in a Crummey trust for the beneficiary’s entire lifetime
- Or until an appropriate age (e.g., age 30)
- Or an event (e.g., graduation from college)
- Decide how the money is to be used and how much the beneficiary can receive
What’s the Problem with the Typical Custodial Accounts?
When the donee is a minor, many parents and grandparents make their annual gifts to a custodial account under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). An UGMA or UTMA account works well and is easy to create and maintain.
If, for example, the beneficiary wants to buy a sports car instead of going to college, there is nothing that donor can do about it.
Crummey Trust: The Catch
With a Crummey trust, you can keep the property in trust for as long as you want, and specify conditions for when and how the money is to be used. You can even determine at what age or milestone the beneficiary can access the funds.
However, there is a catch. To qualify for the gift tax annual exclusion, you must notify the beneficiary that you’ve made the contributions and give him or her a limited period (usually 30 days) during which he or she can withdraw the contributions from the trust.
It’s usually understood that the beneficiary won’t exercise his or her right to withdraw the contributions but will let them remain in the trust.
However, that expectation should always remain unwritten because, if there’s any evidence of it, IRS will use that evidence to say that the beneficiary didn’t really have a power of withdrawal.
Crummey trusts can provide peace of mind to those who want to give monetary gifts while still maintaining some control over the funds. Reach out to our wealth management team to determine if a Crummey trust is right for your situation.
If you have questions, reach out to us at 314-961-1600 or contact us to discuss your situation.
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James Curran works with individuals and businesses and is passionate about getting to know his clients and their goals, both personal and professional. He spends time with them, helping to identify and solve their most pressing questions and concerns.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.