Many people desire to set up a trust for their children, grandchildren, or other relatives. They then wish to relinquish to the trust up to $11,000 a year per person. The trust frequently will provide for expenditures for health, support, maintenance, and education, and the beneficiary will receive his share of the assets of the trust when he reaches a certain age. The trouble is that such a trust does not qualify for the $11,000 per year gift tax exemption.

In order to qualify for the $11,000 per year gift tax exemption, the gift must be one that is referred by the Internal Revenue Code as a gift of a present interest. A gift of a present interest is one which is given to the recipient at once without any restrictions, or it is locked up until the beneficiary reaches the age of 21, subject to certain restrictions. If the gift is unavailable until after age 21, it is a gift of a future interest and it does not qualify for the $11,000 per year exemption.

One way to qualify such a trust to allow the $11,000 per year exemption is to place provisions in the trust concerning what is known as the Crummey provisions. These provisions are associated with a tax court case where the petitioner was a taxpayer by the name of Crummey.

The Crummey provisions allow the beneficiary to revoke the trust and to remove the current gift for a limited period of time. If the gift is not revoked, then the recipient cannot revoke the trust and remove the gift at a later date. By creating a window where the beneficiary can remove $11,000 each year, this converts the future gift into one of a present gift, thereby qualifying for the annual $11,000 exemption.

Here’s an example of how this works: Let us say that Steve and Ginny set up an irrevocable trust for their three children. They name one of their friend’s as the trustee. Each year they provide $11,000 per child to the trust, or $33,000 annually. After each gift is completed, the trustee then writes a letter to each of his children informing the child that he has 30 days to notify the trustee and revoke the gift. If after 30 days the gift is not revoked, then the child's right to revoke it later expires. The trustee can use assets of the trust for each child's health, support, maintenance and education. Any assets that are left in the trust will go to the child when they reach age 35.

Over a 10 year period the parents can give $33,000 per annum, totaling $330,000, to the trust. The total estate tax savings may be as high as $207,000.

It should be noted that Irrevocable trusts and trusts having Crummey provisions are not for everyone but, under certain situations, they work well, and they are one tool in connection with estate planning.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.