Protect Your Tax-Free Gifts to Children by Using a "Crummey" Trust

It is commonly known that a person can give away gifts up to the gift tax exclusion amount (currently $13,000) each year to each of an unlimited number of donees, free of gift and generation-skipping transfer tax. Where the donee is a minor, many parents and grandparents make their annual gifts to a custodial account under the Michigan Uniform Gifts to Minors Act (UTMA).  A UTMA account works well and is easy to create and maintain. However, it has one major defect: when the child (or grandchild) reaches age 18, the beneficiary can do whatever he or she wants with the money in his or her custodial account.  If, for example, the beneficiary wants to buy a sports car instead of going to college, there is nothing that can be done about it.

Most parents don't want their children (or grandchildren) to receive significant amounts of cash at age18. Fortunately, there is a special kind of trust that avoids this problem.  It is called a “Crummey” trust, named after a court case that paved the way for the use of this kind of trust. With a Crummey trust, the property can remain in trust for as long as required without forfeiting the gift tax annual exclusion. Thus, property can be transferred to remain in a Crummey trust for the beneficiary's entire lifetime or until an appropriate age (e.g., age 30) or event (e.g., graduation from college). Parents can then decide how the money is to be used and how much the beneficiary can receive.

There is one catch to a Crummey trust: annual contributions made to the trust will not qualify for the gift tax annual exclusion unless the beneficiary is notified that a contribution has been made, and give him or her a limited period of time (usually 30 days) in which he or she can withdraw the contributions from the trust.  It is usually understood that the beneficiary won't exercise his or her right to withdraw the contributions, but will let them remain in the trust. However, that expectation should always remain unwritten because, if there is any evidence of it, the IRS will use that evidence to say that the beneficiary did not really have a power of withdrawal.  If the beneficiary violates the unwritten understanding by withdrawing property from the trust, there is nothing that can be done about it, except not making any further contributions, so it is important to use Crummey trusts only in certain situations that make sense.