Use of Crummey Powers in Trusts

Use of Crummey Powers in Trusts

The Use of Crummey Powers in Trusts refers to a specific provision that allows beneficiaries of a trust to withdraw contributions made to the trust for a limited period of time. This mechanism is named after the case Crummey v. Commissioner and is often utilized to qualify gifts for the annual gift tax exclusion.

In practice, when a grantor makes a contribution to a trust that includes Crummey powers, the beneficiaries are notified of their right to withdraw the contributions within a certain timeframe, usually 30 days. This right to withdraw effectively allows the contribution to be treated as a present interest gift, thus exempt from the gift tax limits, allowing for tax-efficient estate planning.

For example, if a parent contributes $15,000 to a trust for their child’s benefit and grants the child a Crummey power to withdraw that amount within 30 days, this gift can qualify for the annual exclusion. If the child does not exercise the withdrawal right, the funds remain in the trust for future use.