Published on: 15:27PM 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.
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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.
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