People choose to incorporate a trust into their estate plan for a variety of reasons. One common reason is to protect assets for a minor until the minor reaches the age of majority. Another common reason for creating a trust is the tax benefits that can come with a trust. Unfortunately, these two common reasons could not co-exist without the trust having what is known as “Crummey powers”. When a trust does have Crummey powers, gifts made to the trust can qualify for the annual gift tax exclusion.
Crummey powers are named for the first person to use the structure now known as a Crummey trust. Prior to the development of the Crummey trust taxpayers faced a quandary. Gifts of a present interest qualified for the annual gift tax exclusion but gifts of a future interest did not. The annual gift tax exclusion is a powerful estate planning tool that allows you to gift up to $14,000 per year to as many beneficiaries as you wish tax-free. Married couples can “gift-split” by combining their exclusions to gift assets worth up to $28,000 to beneficiaries each year. Furthermore, gifts made pursuant to the annual gift tax exclusion do not count toward the lifetime gift and estate tax exemption limit, currently set at $5.34 million for 2014. The problem arose when a trust was set up and gifts of a future interest were made to the trust, as is the case when a trust beneficiary is a minor. To get around this problem the “Crummey power” was created.
The Crummey power works like this. Gifts are made to the trust up to the yearly annual gift tax exclusion amount of $14,000. Each beneficiary of the trust then has a specified period of time, typically 30 days, within which the beneficiary can elect to withdraw the gift. If the gift is not withdrawn it becomes part of the corpus of the trust and, therefore, subject to the terms of the trust. The terms usually do not allow disbursements until the child reaches a certain age, such as age 25. The trust maker typically discusses the trust with the intended beneficiaries ahead of time so that they know to refuse the gift when it is offered. By using this method, the gifts are considered a gift of present interest by the Internal Revenue Service because the beneficiaries can access the gift immediately.
For more information about trust in the Quad Cities and the importance of Crummey powers consult with your Quad Cities estate planning attorney.
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