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April 8, 2022

Using Crummey Trusts to Take Advantage of the Annual Gift Tax Exclusion


For 2022, the unified gift and estate tax exemption is set at $12.06 million, adjusted for inflation, up from $11.7 million for 2021. For many families, this means estate tax liability won’t be a concern. However, others may still benefit from using the annual gift tax exclusion as an estate planning strategy, especially since future tax law changes may lower the gift and estate tax exemption. 

For this reason, a Crummey trust can still serve as an important part of your estate planning strategy.

Limitations on the annual gift tax exclusion

For 2022, the annual gift tax exclusion allows you to give gifts valued up to $16,000 per recipient without incurring any gift tax. This $16,000 amount is indexed for inflation, but only in $1,000 increments.

For instance, this means that if you have four adult children and six grandchildren, you can gift each of them $16,000 this year (for a total of $160,000) without paying any gift tax. Since this exclusion is per donor, the amount is doubled for married couples.

However, when giving outright gifts, there is always the risk that the money or property could be wasted, especially if you’re giving to a recipient who may be young or irresponsible. 

As an alternative, you can transfer assets to a trust that names your child (or another recipient) as a beneficiary. This setup allows your designated trustee to manage the assets until the recipient reaches a specified age.

But this strategy comes with a catch, because gifts must be a transfer of a “present interest” to qualify for the annual exclusion. In this context, a “present interest” means the recipient has an unrestricted right to the immediate use, possession, or enjoyment of the income or property included in the gift. 

Because of this, a gift made to a trust won’t qualify as a gift of a present interest unless certain provisions are made in the trust language. Instead, it will be considered a gift of a “future interest” and won’t be eligible for the annual gift tax exclusion.

How a Crummey trust can help

A Crummey trust can offer a solution here. Crummey trusts satisfy the rules for gifts of a present interest but don’t require the trustee to distribute the assets to the beneficiary.

In a Crummey trust, periodic contributions of assets can be coordinated with an immediate power that gives the beneficiary the right to withdraw the contribution for a limited time. The expectation of the donor, however, is that the power won’t be exercised. (This cannot be expressly provided for in the trust document.)

These gifts will not be treated as a gift of a present interest due to the beneficiary’s limited withdrawal right, allowing gifts to the trust to qualify for the annual gift tax exclusion. Note that the tax outcome is determined by the existence of the legal power and not the exercise of it.

Additional requirements

To ensure your Crummey trust will hold up under IRS scrutiny, you must give the beneficiary actual notice of the withdrawal right, as well as a reasonable period (typically at least 30 days) to exercise it. 

If you have further questions regarding the use of a Crummey trust, contact us.

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