Monday, October 03, 2011

The Pros and Cons of a Crummey Trust

If you are looking for a reliable way to leave financial gifts to family members you may find that a Crummey trust is the right estate planning strategy for your family. A recent article in the Wall Street Journal explains that “Crummey trusts are used in many circumstances, but are best suited for making gifts to minors—especially when a parent is giving money to a young child who isn't ready to handle a large sum.”

While it’s true that Crummey trusts can be a very convenient and reliable estate planning tool, they do require a certain amount of annual attention and maintenance, and may not be the right strategy for everyone.

Crummey trusts can be used for many different kinds of assets, but they are most commonly used to protect life insurance policies from estate taxes. Your estate planner can help you set up the Crummey trust and use it to purchase a life insurance policy.  Then you “fund the premiums with annual gifts... That gets money out of the estate while skirting the gift tax. Since the trust owns the policy, the death benefit ultimately goes to the trust, shielding it from federal estate taxes.”

Once the initial work of setting up the trust and buying the insurance policy is done, “The trustee must send out ‘Crummey letters’ each year, informing beneficiaries that they can withdraw the gifted amount during a window of time, say 30 days. Usually, the beneficiary leaves the money in the trust. But the IRS considers it a tax-free gift only if the person has the right to take it in the short term, and the Crummey letter proves that he has that right.”

Sending letters once a year isn’t a difficult task, but forgetting even once can lead to consequences with the IRS. Our advice is to be very careful to select a trustee you can count on to be timely and detail-oriented with the Crummey letters. Alternatively, the estate planner who set up your trust will often be willing to take over the administrative task of sending annual Crummey letters as well. Contact our office for more information.