We Care

Crummey trusts avoid estate and gift tax

Reducing gift and estate taxes, while not the only goal of estate planning, is one important aspect of it. As we have mentioned before on this blog, trusts can be powerful tools for removing assets from your estate in order to decrease estate taxes, while still providing for your family.

Crummey trusts-which take their name from a 1968 case out of the Ninth Circuit Court of Appeals-are trusts which benefit minors while qualifying for exclusion from gift and estate taxation. They involve setting up a trust to purchase a life insurance policy on your life. At your death, the trust will receive the proceeds from that policy and pay them to the minor beneficiaries of the trust.

Up to $13,000 per person per year can be placed in the trust to pay the annual premiums on the life insurance policy. If set up properly, you will not have to pay gift tax on the premium payments, and the trust receives the proceeds of the policy without estate tax.

One of the requirements of a Crummey trust is that letters must be sent to each beneficiary of the trust every year informing them of their right to withdraw the amount gifted to them. The letters inform the beneficiaries of their right to take the gifted amount during a given time period, usually 30 days.

The reason for this rule is that the IRS considers these tax-free gifts only if the recipient has the opportunity to actually take it in hand on a short-term basis. The important thing is to send out the letters, which prove the beneficiaries have had the opportunity.

Despite the fact that estates below $5 million will not face estate tax until the end of 2012, that law could change and require estate plan changes. At this point, there just isn’t any way of knowing what the estate tax law will look like at that time, so it is good to be prepared. Crummey trusts are another tool in your estate planning toolbox.

Source: Forbes, “With Trusts, ‘Crummey’ Is Good,” Robert W. Wood, Oct 9, 2011.