Crummey Trust: A Safe Way to Give Financial Gifts to Minors

Many parents and grandparents want to pass their wealth to their children while they are still alive. Gifts to children or grandchildren can be a good way to reduce a taxable estate.

At the same time, you can control when the minor will receive access to the funds you are gifting. Not to mention this can aid you in taking advantage of the gift tax exclusion for a given fiscal year. One way to accomplish these goals is using a Crummey Trust.

What Is a Crummey Trust?

A Crummey Trust is a type of trust intended to benefit minors. The names for these trusts come from the first person to create this kind of trust in the late 1960s, D. Clifford Crummey.  

A Crummey Trust allows you to give a minor up to $18,000 a year (in 2024) without incurring a gift tax or reducing one’s lifetime gift tax exemption amount. It also prevents a scenario in which the minor, who may be a child or grandchild, gets the money outright. The idea is to keep the funds in trust until the child is old enough to manage them responsibly.

Remind Me, What Is a Gift Tax?

Perhaps you would like to gift someone a significant amount of money or other valuable property. Imagine you’re ready to give your grandchildren their inheritance. Depending on the value of such a gift, the Internal Revenue Service (IRS) may require you to pay a tax on it.

As mentioned above, in 2024, you can give up to $18,000 to any one recipient without incurring the gift tax. (If you and your spouse elect to split the gifts, together you can give up to $36,000 to an individual that year.) Any more than that, and you must file a gift tax return. (Read more about how the rules regarding the gift tax works.)

You may be surprised to learn that the federal gift tax exclusion in 1963 was $3,000. The current annual gift tax exclusion is $18,000, as of 2024. This is not a particularly substantial change, considering that more than six decades have passed.

Crummey Trusts vs. Custodial Accounts

You may have heard of custodial accounts for minor children, where the parent or someone else retains custody of the child’s account. For most of these accounts, the child has the right to access the money when they reach the age of majority. (depending on the state and/or financial institution, this age is generally 18 or 21). You may not, however, want an 18-year-old getting a large sum of money all at once when you have worked hard to save for them.

In contrast, a Crummey Trust allows a person to save money for the benefit of a child in a trust. With this trust, you can decide:

• when the child will receive the money or obtain withdrawal power,
• how the money is managed,
• how much they’ll receive, and for what purposes, and
• other details related to receipt of the funds.

With Crummey Trusts, you should be aware of certain conditions. The IRS has set forth four main criteria a trust must meet to qualify as a Crummey Trust. It also must meet these criteria to qualify for the gift tax exclusion in a particular tax year:

1. First, a trust must convey a “present interest” in a gift to a trust beneficiary. If a beneficiary has a present interest gift, it means they can use, possess, or enjoy the gift (or income from it) right away. They must not face any restrictions in doing so.
   
   This is because a transfer of a future interest in property does not qualify for the gift tax exclusion. Only a transfer of a present interest of property qualifies.
   
   The trust also must notify the beneficiary of their right to make a withdrawal from the trust. That said, the trust’s terms can limit the duration of this right of withdrawal to a certain period, such as 30 days. (The beneficiary does not have to exercise this right.)
    
2. After receiving notification, the beneficiary must have sufficient time to exercise their right to withdraw the funds.
    
3. A beneficiary can choose to exercise their right to withdraw. If they do, they must have immediate and unrestricted access to the funds deposited into the trust.
    
4. The trust’s creator (grantor) cannot set up any official agreement preventing the beneficiary from exercising their right to withdraw. However, once the temporary right to withdraw the funds expires and no withdrawal has been made, the beneficiary can no longer withdraw the money, and it becomes a part of the trust.

The trust funds can be managed, accrue interest, and hopefully grow to even more than the initial deposit once they become available to a beneficiary later on in life.

Other Features of Crummey Trusts

Several other features of a Crummey Trust may be attractive to a grantor.

For example, they can decide ahead of time how the beneficiary can spend the trust funds. The grantor may outline terms that limit the beneficiary from withdrawing funds only for certain purposes, such as their education, health, maintenance, or support. The terms of the trust can also guide investment of the funds.

Additionally, the beneficiary does not have to withdraw funds from the trust by a certain age. With other kinds of trusts, the law may require a beneficiary to withdraw their trust funds once they reach age 18 or 21.

Potential Downsides of a Crummey Trust

However, there are also practical realities to consider. A Crummey Trust requires good record-keeping regarding gifts made and notices issued to beneficiaries. This can be a deterrent to some.

In addition, as beneficiaries mature, they’ll likely become able to review and understand notices regarding their withdrawal rights. If they wish to exercise this power, this may make grandparents or gift givers hesitant to make further contributions to the trust.

Finally, although distributions are not required, the income made by the trust can be a tax liability of the beneficiary because they are generally treated as grantor trusts for tax purposes. However, this may not be a significant issue for many minor family members, as they are likely to be in a low-income tax bracket.

Consult With an Estate Planning Attorney

Before setting up any type of trust, be sure to talk to an estate planning attorney about what is right in your situation. Find a qualified estate planning attorney near you today.

Get more information on trusts and on transferring assets to grandchildren.