One of the downfalls of leaving a large estate to your children is the subject of estate taxes. These taxes can be considerable. Many people opt to gift money to their children to avoid paying estate taxes. Others set up trusts, in many cases Crummey Trusts in order to protect their estate and their children’s interest in it. Determining if a Crummey Trust will work for your needs is the first step towards providing your children with the estate you hope to leave them.
First, consider that it is possible to gift your children money. As long as the amount is $13,000.00 or less a year, the money is non-taxable. While this can serve as an adequate measure to distribute funds without worrying about estate taxes, and will work for estates of all sizes, many parents are concerned that the children in question are mature enough to handle the money.
If you would still like to gift the $13,000.00 each year, but wish to provide protection for that money, a good idea is to set up a trust. A formal trust will keep the money out of the child’s hands until they reach a pre-determined age. The money in question would be gifted directly to the trust, after which a trustee would invest and administer the funds. It is possible to name yourself as the trustee and thus save even more money.
There is a downfall to this concept. In order for the money to be considered a gift, the child must have a ‘present interest’ in the money. Simple put, they must have the right to take and spend the money at any given time. It is possible to put restrictions on the money and still be eligible for the gifting tax break. One such way to do this is a Crummey Trust.
The idea of the Crummey Trust comes from the Crummey family. They set some significant restrictions on the trusts of their children and when the IRS tried to deny them the tax exclusion, the Crummey family went to court and won.
What is different about the Crummey Trust is that the child does not have rights to any of the income. What they have is a right to make a withdrawal from the trust in the total amount of each gift as long as they do so within thirty days of the gift date. This clause means that the child has a ‘present interest’ in the trust. If the child does not make the withdrawal of the gift prior to thirty days, the gift reverts in full to the trust and the child loses the right to withdraw it until the pre-determined distribution date.
As you can see, a Crummey Trust offers a large degree of protection for the both the gifted money and the overall trust. For parents looking to gift part of their estate each year without worrying their children will spend it, the Crummey Trust is an excellent option.