Dan Hall & Associates Solid Plans for Peace of Mind

Crummey Trusts

The Crummey Trust (Involving Multiple Beneficiaries)

Crummey Recap

The purpose of the Crummey trust is to enable people to gift into a trust and receive the annual gift tax exclusion, while still enabling the gifts to be held in trust for the beneficiary rather than being given to them outright.  The trust accomplishes this by giving the recipient a certain amount of time (at least 30 days) to take immediate control of the gift; if the recipient chooses to let this time period lapse, the gift remains in the trust.  Because the recipient had the chance to take control of the gift, the gift qualifies as a present interest, and can therefore qualify as part (or all) of the donor’s annual gift tax exclusion amount.  When the trust has only one beneficiary, this becomes a great way to gift into a trust without having to pay the gift tax or using up any of your lifetime exemption amount (which is $5.45M per person in 2016).  However, if the trust has more than one beneficiary, the issue becomes more complicated.

 The Five and Five Rule

A trust beneficiary’s withdrawal right is considered a power of appointment under the tax code, and thus a “release” of the power of appointment is considered a transfer of property by the person who had the power, if the amount that lapses exceeds the greater of $5,000 or 5% of the aggregate trust assets.  This is known as the “five and five” rule.  So, if a Crummey trust beneficiary chooses not to withdraw the gift (which is the point, after all) the lapse is considered a release of their power of appointment, and therefore a transfer of property from the beneficiary to the trust.  In other words, the beneficiary’s decision not to withdraw the money is considered a gift to the trust equal to the difference between the total gift into the trust minus the value of the five and five power.

Now, if the trust has only one beneficiary, this isn’t a problem, since you are only gifting the money to yourself.  However, if the trust has multiple beneficiaries, then the IRS considers a lapse in your withdrawal right a gift to the trust’s other beneficiaries.  And once the money reverts to the trust, it is no longer considered a present interest (because it cannot be immediately withdrawn), and so becomes a taxable gift.

Avoiding Gift Tax Liability

This certainly throws a wrench into the works, doesn’t it?  One way to avoid this, of course, is to ensure that the original donor never gifts more than $5,000 (or 5% of the trust’s assets) into the trust in the first place.  However, this solution rather defeats the point of using the annual gift tax exclusion, since the exclusion amount substantially exceeds the $5,000 limit.

To avoid the “five and five” rule, and to increase the gift per donee to the annual exclusion amount, a “hanging” Crummey power is used.  The holder of the hanging power has the right to withdraw all of the contribution to the trust up to the annual gift tax exclusion amount; however, the withdrawal power (usually extended to the end of the calendar year) only lapses the extent of the five and five limitation.  The withdrawal right over the amount of property in excess of the five and five rule doesn’t lapse, but “hangs” or rolls over into the next (or future) calendar year, when the additional amounts in excess of the five and five rule can lapse without a taxable transfer.

By Genevieve Hoffman 7/13/10; updated in 2016

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