What is a Crummey Trust?
A Right of Withdrawal Trust, a.k.a. a Crummey Trust is an irrevocable trust used by parents, grandparents, etc., to make gifts to a trust for their children and grandchildren, taking advantage of their annual gift tax exclusion.
If you are looking into a Crummey Trust as a part of your estate plan, keep in mind that it must be drafted by an experienced and knowledgeable attorney who is current on the latest U.S. tax cases and changes in the law. The expert attorneys at The James C. Shields Law Firm will ensure that your Crummey Trust is drafted and administered properly, taking into account estate tax, gift tax, and other tax implications. This is not an area for do-it-yourselfers. The risks of getting it wrong are too great.
Advantages of a Crummey Trust
How this works: A Crummey Trust allows you to take advantage of the gift tax exclusions and simultaneously minimize your estate taxes. By making gifts into the trust, you are trusting that the beneficiary will withdraw their trust funds at a later date when they can manage their financial affairs in a more mature manner. Although they have the right to withdraw the funds within a specified amount of time, either directly or through a parent/guardian if under 18 years old, the whole intent is for them to wait and not squander the money.
You may have the right to make the beneficiary/their parent(s) aware that you will withhold future gifts to the trust if the annual gift is withdrawn. However, prior to having that discussion, and to avoid violating any IRS regulations, consult with one of our attorneys at The James C. Shields Law Firm.
One of the biggest benefits of a Crummey Trust is that you do not have to provide an opportunity for the beneficiary to withdraw the entire balance of the trust at age 21. The balance of the assets can be held in the trust until they are older and, once again, more mature.
Another advantage is that a Crummey trust can have multiple beneficiaries, and unlike some college savings plans, there are no penalties if the funds are not used for higher education.
Disadvantages of Crummey Trusts
One of the biggest disadvantages with a Crummey Trust is that it may affect the beneficiary's ability to qualify for financial aid for college. For more information on this, consult with our attorneys at The James C. Shields Law Firm.
An additional disadvantage is that a right of withdrawal is provided to your beneficiary whenever you make a gift to the trust. Also, since this is an irrevocable trust, you cannot "un-gift" a gift.
For more information on this or any other type of trust, call The Law Firm of James C. Shields to schedule a no-obligation appointment with one of our expert attorneys.