The Crummey Trust is named after D. Clifford Crummey, the first taxpayer to use this kind of trust successfully. Crummey Trusts may be used for gifts to beneficiaries of any age. Any time you give property to the trust, the beneficiary must have the right to withdraw the contribution during a brief window (typically 30 or 60 days). If the beneficiary does not withdraw the property, the gift becomes final and is locked in the trust until the trust terminates. The right to withdraw the contribution converts it into a present interest, thereby ensuring that the gift qualifies for the gift tax exclusion.
The primary benefits of a Crummey Trust are as follows:
Although the trust has a separate taxpayer identification number and files an annual tax return, the beneficiary must in most cases pay income tax on the trust's income.
Crummey Trusts are most often set up to pay the premiums on a life insurance policy as a method of avoiding both gift and estate tax liability.
The disadvantages of these trusts are as follows:
It is common for 2503(c) Minor's Trusts and Crummey Trusts to be combined into a hybrid trust that acts as a 2503(c) trust until age 21 and then converts to a Crummey Trust. This allows annual gifts to the trust to continue to qualify for the gift tax exclusion after the child reaches age 21.
Generally speaking, most parents will find that using the Uniform Gift/Transfer to Minor's Act meets their needs just as well as a 2503(c) Minor's Trust or a Crummey Trust. Note that all three types of trusts are treated as the child's asset for financial aid purposes, and so have a high impact on need-based financial aid eligibility. In most cases the parents would be better off establishing section 529 plans for their children.
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