A Crummey trust is an irrevocable trust or estate planning technique that can be used to shelter against claims from creditors and the IRS while providing money to your children or grandchildren. It can also reduce the tax burden of your estate.
It is a legal arrangement that allows you to give money to your children or grandchildren while minimizing the amount of taxes they will pay on it. It also allows you to place limitations on when the recipient can receive it.
Crummey trusts can also protect your children's inheritance from divorce proceedings in which the future spouse of your child could be awarded a portion of their assets.
Spendthrift clauses in Crummey trusts safeguard the trust's assets. These clauses forbid beneficiaries from selling, transferring, or otherwise disposing of their interests in the trust assets, and they shield beneficiaries' interests from creditors.
What type of assets can you put into a Crummey trust?
The Crummey trust takes advantage of gift tax exclusions specified under the law. In most cases, you are allowed to make annual gifts up to $16,000 ($17,000 in 2023) per person without needing the recipient(s) (or anyone else) who receives these gifts to pay any gift tax on those gifts because they are made through this type of vehicle.
What assets are protected by a Crummey Trust?
The most common use of a Crummey trust is to protect assets owned by the trust, like real estate and vehicles. You can also gift these assets away without impacting their tax-sheltered status.
Can a Crummey Trust protect against IRS and Creditor claims?
The Crummey trust has been in use since 1962, but it has recently become much more popular because it can protect against both creditor claims and IRS liens against property.
Gifts made in trust often do not qualify for the annual gift tax exemption since the trust beneficiary obtains a future interest rather than a current stake in the property. However, in the notable case of Crummey v. Commissioner, the Supreme Court determined that providing a beneficiary a temporary right to withdraw the gift qualified as a present interest and enables the gift to be eligible for the annual gift tax exclusion.
Benefits of a Crummey Trust
One of the benefits of a Crummey Trust is that it protects your beneficiaries from creditors and taxes. This is important because if you die without setting up a trust, then all of your assets will be distributed to your loved ones and creditors according to state law—which may not be ideal if you have children or other family members who need money.
The benefit is that it can protect against creditor claims and ensure your beneficiaries get the money you've left without needing court intervention.
You could also use this type of trust as part of your will, which means the person who receives your estate will be able to manage it on their own or appoint someone else to do it.
In summary, a Crummey Trust is an excellent way to protect assets against creditor claims and IRS actions. It can be used to help protect your assets in the event of a divorce and other unforeseen circumstances. If you are interested in creating or updating your estate plan with one of our experienced attorneys today, give us a call at 310-626-4404 or fill out our online contact form today.