Crummey Trusts
 continued
from Home Page ...
There are many non-tax benefits to making lifetime gifts to loved
ones, aside from the obvious tax benefits. For example, what better
way to preview the financial maturity of your loved ones with an
inheritance in the future than through a dress rehearsal in
the present … while you are still in the audience?
Keeping Control
If you are like most people, you may be
reluctant to part with control over how your lifetime gifts will be
used once transferred. Unfortunately, when you retain direct control
over a gift, the value of the gift (and its appreciation) may be
included in your estate for estate tax purposes upon your death.
Worse yet, the gift may be taxable at the time of transfer as a
future interest gift, rather than treated as a nontaxable
present-interest gift.
To qualify as a nontaxable present-interest gift, the
donee must be able to exercise complete and unrestricted control
over the gift. Fortunately, there are exceptions to this general
rule, such as custodial accounts for minors. Another exception is
the Crummey Trust, as created in the landmark case of Crummey
v. Commissioner, 397 F2d 82 (9th
Cir. 1968).
Although the Crummey case carved a very narrow
exception to the general rule regarding the present-interest
requirement for nontaxable gifts, the path is narrow that leads to
safety. Therefore, it is essential for the success of your Crummey
Trust that you dot all of the legal i’s and cross all of the
procedural t’s. Truly, the devil is in the details here.
[Note: If a Crummey Trust is properly created, administered, and
funded with life insurance, then 100 percent of the eventual
insurance proceeds will be excluded from the trustmaker’s
estate under current tax law.]
Crummey Trust Requirements
First, you create an irrevocable trust
agreement (i.e., you cannot change its terms once signed by you)
containing all of the strings you wish to attach to the
future gifts to the trust. Second, you make lifetime gifts to the
trustee on behalf of your trust beneficiary (or beneficiaries).
Third, the trustee must provide written notice to the beneficiary
(or their legal guardian, if the beneficiary is a minor) each time
you make such a gift, giving the beneficiary a period of time
(typically not less than 30 days) to exercise their right to
withdraw all or part of the gifted amount.
If the beneficiary does not exercise this withdrawal
right, then the gift lapses and the trustee administers the
gift for the beneficiary according to the strings you attached.
These strings may provide valuable protection for your gifts from
divorces, lawsuits, bankruptcies and squandering. Conversely, if the
beneficiary exercises this withdrawal right, then you may have
gained a valuable insight into their current financial maturity
level. In either case, you may wish to revise your estate plan
accordingly.
As on Broadway, a dress rehearsal today may
prevent bad acting tomorrow.
|
