Crummey Trust
A Crummey Trust is an irrevocable trust that uses withdrawal rights — known as Crummey powers — given to beneficiaries upon each contribution to convert future interests in the trust into present interests that qualify for the annual gift tax exclusion under IRC Section 2503(b), a mechanism established in the Ninth Circuit Court of Appeals decision in Crummey v. Commissioner (1968).
The central challenge of funding an irrevocable trust with annual exclusion gifts is the present interest requirement. The annual exclusion under IRC Section 2503(b) applies only to gifts of a present interest — an unrestricted right to use, possess, or enjoy the transferred property immediately. Gifts in trust are typically future interests because the trustee controls the assets and distributions are made at the trustee's discretion or according to the trust's distribution standards. Without a mechanism to convert these future interests into present interests, annual exclusion gifts cannot be made to trusts.
The Crummey power solves this problem. Named for the taxpayer in the Ninth Circuit case that validated the mechanism, a Crummey power is a temporary right of withdrawal given to each trust beneficiary upon contributions to the trust. The right is typically exercisable for 30-60 days after the contribution. If not exercised — and in practice, beneficiaries virtually never exercise Crummey withdrawal rights, because doing so would reduce the trust assets available for their long-term benefit — the right lapses and the contribution remains in the trust subject to normal distribution terms. The IRS has accepted that the mere presence of the right, even if it is rarely or never exercised, converts the gift into a present interest.
For the Crummey mechanism to be effective, beneficiaries must receive actual notice of the contribution and their right to withdraw. The notice requirement is critical — trusts that give Crummey powers without notifying beneficiaries risk IRS challenge. Notice should be given promptly after each contribution, and many practitioners advise that beneficiaries acknowledge receipt in writing, though no such requirement appears in the Code.
The IRS has challenged Crummey powers given to beneficiaries who have no other interest in the trust (called naked Crummey powers) and to large numbers of beneficiaries in what are sometimes called Crummey trust programs. The IRS has issued Technical Advice Memoranda questioning whether nominal, lapsing rights given to beneficiaries with no other trust interest qualify as present interests. Best practice is to give Crummey powers to beneficiaries who have meaningful interests in the trust beyond the withdrawal right.
Life insurance trusts (ILITs) are the most common use of the Crummey trust mechanism. An ILIT holds life insurance on the grantor's life, and annual premium payments are funded through annual exclusion gifts. Without Crummey powers, the premium payments would be taxable future-interest gifts consuming lifetime exemption; with Crummey powers, the same payments qualify as annual exclusion gifts.