- Does putting a large amount of your investments in a trust seem like too large of a commitment all at once?
- Are you comfortable giving investments and cash annually to your children without controlling how the money is utilized?
- Are you worried about losing control of your assets by putting them in a trust?
- Is annual gifting big enough to matter?
Thoughtful trust & estate planning is a worthwhile effort, which we help our client partners navigate. For large estates that are trying to reduce their estate taxes for their heirs, planning can entail large and permanent financial decisions about your assets. These decisions can be stressful and complex.
Annual gifting also removes assets from your estate and can be a more gradual, comfortable approach. However, if you are annually gifting cash or investments to children, is there a way to maintain control consistent with your broader estate planning wishes?
A Crummey trust is a type of trust that is used to make annual gifts to beneficiaries while taking advantage of the annual gift tax exclusion. The trust is named after a court case in 1968, Crummey v. Commissioner, in which the court ruled that a trust beneficiary has a present interest in the trust property if they have the right to withdraw the property within a certain period of time (usually 30-60 days). The beneficiary does not have to actually withdraw the property, yet this qualifies the gift for the annual gift tax exclusion. Problem solved.
In practice, this can lead to substantial estate tax savings while maintaining control. For example, a married couple with 3 children can contribute $17,000 per child, per spouse, based on the current gift tax exclusion. This results in $102,000 in annual gifting to remove these assets from the taxable estate. On the surface, I can see how this does not seem material if a family has a large estate they are attempting to protect from taxes.
However, if these gifts are made annually over 30 years and invested at a 7% annual return, the result would be $9.6 million removed from the government’s tax reach. This strategy could save $3.85 million in estate taxes at the current 40% tax rate. This strategy is material for even the largest estates.
It’s important to note that there are other requirements for Crummey trusts, such as providing written notice of the withdrawal right to the beneficiaries and carefully documenting the process. We help our client partners coordinate these activities with our trust & estate attorney network.
Investment advisory services offered through Essential Partners, an SEC registered investment advisor. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. Investing in financial markets