If you’ve been successful in saving your wealth into your golden years, chances are you may be thinking of ways to share your good fortune with your family through your estate plan. Older people often consider making sizable gifts to their grandchildren, in order to help them and in order to reduce the size of their own estate for tax purposes, but are hesitant due to concerns that the grandchildren won’t be able to handle large sums of money. With a Crummey trust, you don’t have to worry about losing control when you make a gift.
By law you and your spouse can each give each of your grandchildren up to $13,000 a year without incurring any gift tax. However, not many people are comfortable cutting a $26,000 check to little Johnny and hoping he saves it for a rainy day. With a Crummey trust you can “give” money to grandchildren for tax purposes, but retain control over it at the same time.
A “Crummey” trust, named for the man who pioneered the idea back in the 1960s, is a trust that is set up so that whenever you make a contribution, the beneficiary has the right to withdraw that contribution for the next 30 days. If they do nothing, the money stays in the trust and the beneficiary can no longer access it directly until they reach an age of maturity that you specify. For instance, a trust might end when a grandchild turns 28. Or a grandchild might get a third of the assets at age 25, a third at 30, and the rest at 35.
This structure is important because if you had simply put the money into a custodial account, the moment the minor reaches adulthood (usually at age 18 or 21) he or she will own the account completely and be free to spend the money as they please. A typical trust is also problematic because if you establish a trust that your grandchild can access only when they turn a certain age, you’re not really “giving” the grandchild the money; you’re just giving him or her a future interest in the money. Legally, you need to give a “present interest” in the money in order to avoid the gift tax. With a Crummey trust the contribution still counts as a “gift” for tax purposes, because of the 30 day access window.
Obviously this access window creates the risk that the beneficiary will withdraw the money during the 30 days. However, even if the child decides to withdraw the money, he can only withdraw the amount of the most recent gift, not the entire trust. After that, you could eliminate all future withdrawal opportunities simply by ceasing to make any more gifts. Sounds like a pretty strong deterrent to me! The property already in the trust will remain intact and growing until it’s ready to be distributed.
There are many considerations to take into account when considering establishing a trust, and no one structure fits all scenarios. You should speak with a Massachusetts estate planning attorney before you decide if a Crummey trust is right for your gifting plan.