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A (Not So) "Crummey" Trust

Your young, your a professional, and your beginning to make the kind of money that can not only support your family, but potentially provide them with security for years to come. Not many people want to think about it, but now would be a fantastic time to start developing an estate plan.  The longer you wait to start planning for your estate, the larger the portion of your life's accumulation that will end up going toward taxes, creditors, or other unwanted individuals upon your death.  On the other hand, taking advantage of certain allowances in the law and planning for your estate earlier in life can insure that a more sizable portion of your assets will make their way to your loved ones.

A prime example of an estate planning tool that can (and should) be utilized early on is a Crummey Trust.  While the name might fool some people in to thinking its a "Crummy" trust, you'll probably soon change your mind once you realize it can potentially save you (and ultimately your beneficiaries) millions in estate taxes.  The Crummey Trust is actually named after the action in which the Courts upheld the viability of such a trust  (Crummey et al. v. Commissioner of Internal Revenue, 392 F.2d 82, (9th Cir.1968)).  In detailed complex terms, the Court determined that annual gift tax exclusions can be utilized to fund an irrevocable trust on behalf of beneficiaries so long as the beneficiaries are provided an opportunity to immediately take possession of the funds.  In way simpler terms, the Court determined that during your life, you can use your annual gift tax exclusion (currently $14,000.00 per year; $28,000.00 for married people) every year to fund a trust for the benefit of each of your desired beneficiaries; the only caveat is that the beneficiary(ies) must be given an opportunity to take immediate possession of the gift amount prior to every time the annual funds are to be added to the trust.  This is generally fulfilled by sending a letter to the beneficiary with a notice that he/she has thirty (30) days to withdraw the funds before they are deposited in to the trust.

So what does this mean and why is it important?  Well basically, when you die, your assets are added up and if they surpass a certain amount (currently $5.43 million), every dollar past that amount will be taxed at a certain rate (currently %40).  So, if you have a viable method to reduce your personal estate prior to death by transferring part of your estate to your desired beneficiaries without suffering any tax consequences, you should consider utilizing it.  The Crummey Trust provides you with a fantastic opportunity to do just that.

The following is an example as to how a Crummey Trust could work:


John is a thirty (30) year old single father of two (2), Jack and Jill.  John is fairly wealthy and has already accumulated about $10 million dollars in his life.  He knows that his wealth will only grow, and that if he were to pass away without an estate plan, a large portion of his estate would go toward estate taxes.  His attorney suggests to John a Crummey Trust for purposes of lowering his current personal estate and creating a trust that will pay out to his children upon his death.  So the attorney creates the Crummey Trust, every year John provides $28,000.00 to the trust ($14,000.00 annual gift tax exclusion for both Jack and Jill), every year the trustee of the trust provides notice to Jack and Jill that they have the right to immediate possession of their individual $14,000.00 if they choose, and every year both Jack and Jill opt not to take immediate possession as they know that their father's wish is to use it to fund the trust (and that he would likely stop doing it in future years should they start taking the money).  John does this for fifty (50) years before he passes away.  In this time, he was able to fund the trust with $1,400,000.00 dollars that passes to his children tax free.  In addition, the money in the trust accumulated interest and gains through investment during those fifty (50) years in the amount of $600,000.00; as such, the total amount being passed on to Jack and Jill outside of John's estate is $2,000,000.00.

The above example shows how valuable a Crummey Trust can be.  Keep in mind that John was unmarried and only utilized the Crummey Trust for his two (2) children.  If he was married, he and his wife could have doubled the yearly allotment for each of his children.  In addition, if he wanted to expand his Crummey Trust to include grandchildren, other relatives, and possibly friends, he could have potentially transferred a much greater portion of his estate to his desired beneficiaries with little to no tax consequence.  This is the benefit of a Crummey Trust.

As good as all the above sounds, it does not even come close to the benefits that can be acquired from a Crummey Trust when paired with an Insurance Policy.  While a somewhat more complex topic, the ultimate desired result of pairing an Insurance Policy with a Crummey Trust is that the Crummey Trust funds the policy during your life, and upon your death, the Insurance Policy payout fully funds the Crummey Trust.  Because this is all done outside of both you and your estate, the entire amount contained within the Crummey Trust passes to your beneficiaries potentially tax free and is not counted toward your estate.

If you have any interest in forming a Crummey Trust, or if you wish to discuss other Estate Planning methods, feel free to Contact Nowakowski Legal PLLC for a free consultation.

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