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Do Good Things With A Crummey Trust

(posted: October 19th, 2015)

Giving lifetime gifts to family members is a tried-and-true method for reducing your taxable estate. The problem? You have to give up control over the assets.

Strategy: Set up a Crummey trust. Despite the negative-sounding name, this estate planning technique can produce favorable tax results.

As long as you meet certain requirements, you essentially keep control of the assets while removing them from your estate. In other words, "you can have your cake and eat it, too."

Here's the whole story: Under the annual gift-tax exclusion, you can give assets valued up to a specified limit to each family member each year without triggering any gift tax.

The exclusion, which is indexed in $1,000 increments, is $14,000 for 2015. Thus, you can give three children a maximum of $42,000 this year with zero gift tax ($84,000 for a joint gift by a married couple).

However, with this method, you run the risk that the money or property may be squandered, especially if the child is young and irresponsible. Alternatively, you can transfer assets to a trust and name the child as a beneficiary. In that case, the trustee you appoint will supervise until the child reaches an age designated in the trust.

The catch: To qualify for the annual exclusion, the gift must be one of a "present interest." When a gift is placed in a trust and isn't distributed to the beneficiary for some time, it is generally considered a gift of a "future interest." This type of gift is subject to gift tax.

Here's where a Crummey trust (named for the court decision authorizing its use) can come to the rescue. Typically, the trust documents entitle the child to withdraw funds from the trust during a small window of opportunity (e.g., a period of 30 days). Because the beneficiary has the present right of withdrawal, even though it is rarely ever used, the transfer of assets to the trust qualifies for the annual gift-tax exclusion.

Note that the trust principal doesn't have to be paid out when the beneficiary reaches a certain age. In this way, the trust can potentially continue for a long period of time.

There are several variations available on this theme, but this gives you the general idea. For more information, please Contact Us.

"More gold has been mined from the thoughts of men than has been taken from the earth."
~ Napoleon Hill

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