There’s Nothing Half-baked About a Crummey Trust
According to a recent case in U.S. Tax Court, there is nothing wrong with using what are referred to as Crummey trusts as part of their estate plan, no matter what the Internal Revenue Service (IRS) says.
See, a Crummey trust is a device used to huge tax-free transfers of large sums of money (In this case, as much as $1.6 million) without it affecting lifetime gift-tax exemptions. They were named Crummey because that was the name of the Methodist minister who was the plaintiff in the 1968 case that established them.
In the recent case, Mikel v. Commissioner, the U.S. Tax Court ruled against the IRS and in favor of a couple who were using the device in their estate plan, as a way to avoid state estate taxes. According to experts, this case reaffirms the usefulness of Crummey trusts in estate planning, primarily for those who have assets but aren't super-rich. Even though a great many people avoid federal estate taxes, many of them owe their state a significant tax, because their exemption isn't always as high.
Currently, 18 states plus the District of Columbia have a state-level tax on estates; Georgia had one, but it was repealed on January 1, 2014. Some of the state inheritance or estate taxes can be relatively high; in New York, for example, the top rate is 16% and it features something they call "the cliff, which can be relatively treacherous if an estate has more than $3.28 million in assets. It's called "the cliff" because it doesn't only apply to the amount over $3.28 million if you catch it, but it's 16% of every single dollar.
Crummey trusts can help in such situations, because it those who are planning their estates can make tax-free transfers using the "annual exclusion" to place assets in trusts for heirs, which is especially useful for heirs who are minors, such as grandchildren. For example, if a couple had ten granchildren, they could make gifts to Crummey Trusts to all 10 for ten years and shield more than $1 million from tax, while leaving a significant amount of money to all of them. The fact is, when a couple has a ton of grandchildren, setting up Crummey trusts is an excellent way to move a lot of assets away from the tax man.
There is one very crucial catch to keep in mind with Crummey trusts, because legal technicalities require the heirs to be given the right to . To satisfy legal technicalities, the heirs (or their guardians) must have the right and opportunity to withdraw funds for a period of between 30 and 60 days each year. Most heirs don't do that, of course, because they're afraid that, if they do, the gifts may stop, but it has to be there.
Another strange aspect to Crummey trusts can be is that they can be taxable to beneficiaries even if the trust doesn't pay out income. That means those preparers considering setting up Crummey trusts should decide early on whether it's worthwhile to have a single Crummey trust for all heirs or a separate trust for each one.
In the case the IRS challenged and lost, the Mikels' Crummey trusts were set up to benefit 60 different heirs, and were able to transfer $1.6 million every year tax-free without even touching what was then a $1 million lifetime federal gift- and estate-tax exemption for each spouse. As of 2015, that exemption is $5.43 million, but you can see how such a large gift every year would still be useful even now. The IRS objected to the maneuver, but the Tax Court judge shut down the IRS and sided with the Mikels, and that the $1.6 million per year transfer was, in fact, legal.
