Jul 12, 2014
Home| Tools| Events| Blogs| Discussions| Sign UpLogin


October 2012 Archive for Farm Estate and Succession Planning

RSS By: Andrew Zenk

This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.

Andy is an Agribusiness Consultant for AgCountry Farm Credit Services, Fargo N.D., a farmer owned cooperative and part of the Farm Credit System serving eastern North Dakota and northwest and west central Minnesota.

Making Gifts to an Irrevocable Trust? Better Do Crummey Notices!

Oct 08, 2012

 

Importance of a Crummey Power in a Trust Document
A "Crummey Power" qualifies gifts made to certain trusts for the annual gift tax exclusion. Without it, such gifts to the trust would otherwise not qualify. If gifts made are deemed to not qualify, they remain in the giver’s estate for estate tax purposes. This unintended result can have negative implications on one’s estate plan.   
 
Crummey powers get their name from a 1968 tax court case (name of the taxpayer) in which the concept was first tested. Its applicability has subsequently been tested since then, and deemed appropriate by the tax courts. It can be a very useful tool for an estate plan. 
 
Understanding the importance of this power begins with a review of the annual gift tax exclusion. A taxpayer can give up to $13,000 (for 2012) per person to any number of recipients in a calendar year without affecting their federal estate and gift tax. Gifts that qualify for this annual exclusion are never taxed from a federal estate or gift tax standpoint. Meaning, no gift tax is owed when the gift is made, nor included in the taxable estate at death. Understand, however, that a gift of tax-deferred assets (harvested grain, for example) retains the income tax liability in the hands of the recipient.   The type of asset given is not restricted: personal property, cash or cash equivalents, real property, etc. are all available. Instead, the asset’s value is considered in the determination. 
 
The exclusion is available each year, and is not limited by the number of potential recipients.  One can give any number of other people up to $13,000 each. The exclusion is a "use it or lose it" device. If one does not completely use the allowed exemption in the given year, that unused amount is gone; unable to be "banked" for subsequent years’ gifts. 
 
The annual gift tax is an important estate planning tool to pass belongings to others during one’s life. Often estate plans will utilize this tool to aid in wealth transfers, business succession planning and potentially reducing one’s estate tax exposure. 
 
There are requirements to be met when utilizing the annual gift exclusion. Specifically, a gift must "qualify." One requirement to using the exclusion includes the qualification of a present interest gift. 
 
To qualify for the annual exclusion, a gift must be a present interest – the recipient must have all immediate rights to the use, possession, enjoyment and income of the property. By contrast, a future interest, which is a gift where the use rights, possession, enjoyment and income of the property are delayed until a future date. Crummey powers are important because they qualify gifts to certain trusts that would otherwise not qualify because they are future interests. 
 
The Crummey power gives the beneficiaries a time limited right to withdraw their share of the assets given to the trust. If the beneficiaries do not exercise their right to withdraw, it stays in the trust. Most importantly, it QUALIFIES for the annual gift tax exclusion. The tax court has heard many cases dealing with these allowances; and if done correctly, they remain an effective estate planning tool. 
 
To illustrate the importance of Crummey powers, imagine a scenario where a giver makes gifts to various family members, utilizing the annual allowance. He uses an irrevocable trust. There are Crummey powers available in the trust; however, no actual Crummey notices are given each year. The giver was seemingly able to reduce the value of his estate and also protect the assets, by giving them via a trust. However, the IRS could easily argue that since no Crummey notices were given, the gifts to the trust do NOT qualify for the annual exemption. Thus, they would be included in the giver’s estate for estate tax purposes. Clearly this is not what the giver intended. 
 
Crummey notices are a very important and necessary part when making gifts to trusts. Make sure to consult your professional and properly complete them when making gifts to trusts. Without them, unintended consequences may arise. 
 
_________________________________
 

Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
 

 

 
Log In or Sign Up to comment

COMMENTS

Legacy Newsletter
 

Follow Us

Facebook Twitter You Tube
 

Hot Links & Cool Tools

    •  
    •  
    •  
    •  
    •  
    •  
    •  

facebook twitter youtube View More>>
 
 
 
The Home Page of Agriculture
© 2014 Farm Journal, Inc. All Rights Reserved|Web site design and development by AmericanEagle.com|Site Map|Privacy Policy|Terms & Conditions