Crummey Trusts in Gainesville, FL

What is a Crummey trust?

A Crummey trust is a means to give away some of your assets in trust without incurring any gift or estate taxes. If the trust is set up properly, then all of the assets in the trust are not subject to federal estate tax and the transfers into the trust are not subject to the federal gift tax. One of the most common Crummey trusts is an irrevocable life insurance trust.

How does a Crummey trust work?

The steps for using a Crummey trust are:

1. Set up an irrevocable trust;

2. Name someone other than the grantor as trustee;

3. Transfer assets into the trust, but not more than the annual exclusion amount; and

4. Have the trustee send a Crummey letter each time there is a transfer into the trust.

Let’s look at each step individually.

1. Set up an irrevocable trust.

The word “irrevocable” means that any transfers to the trust cannot be taken back. This is important as it is the only way to move assets out of your taxable estate when you transfer assets into trust. However, in Florida trusts are revocable by default. This means that the declaration of trust must explicitly state that the trust is irrevocable.

When setting up the trust, you will make decisions about who should be a beneficiary of the trust. You will also make decisions about when and how you want that beneficiary to receive the trust assets. If the trust contains a spendthrift provision, then as long as the assets are in trust, the assets are generally protected from the creditors of the beneficiaries. You could also create a discretionary trust, which would result in an even greater amount of creditor protection.

2. Name someone other than the grantor as trustee.

When you create the trust, you need to name someone as trustee. This has to be someone other than you. If you both create the trust and manage the trust assets, then the IRS will say that the assets still belong in your taxable estate after you die. And that means that the assets can be subject to the estate tax. To avoid this, you make someone else the trustee of your Crummey trust.

3. Transfer assets into the trust, but not more than the annual exclusion amount.

Once the trust is created, you want to transfer assets into the trust. These assets will be managed and used according to the terms of the trust. And everything moved into the trust will not be a part of your taxable estate. However, if you transfer more than the annual exclusion amount, then the transfers are subject to the gift tax. The amount of the annual exclusion depends on how many beneficiaries the trust has and whether the trust was set up by an individual or by a married couple. In 2021, an individual can contribute up to $15,000 annually to the trust for each beneficiary and a married couple can contribute up to $30,000 annually to the trust for each beneficiary.

4. Have the trustee send a Crummey letter each time there is a transfer into the trust.

Each and every time a transfer is made into the Crummey trust, a letter must be sent to the beneficiaries. This letter must inform the beneficiaries that they have a right to withdraw the recently transferred funds within a specified timeframe (usually 30 days). The reason for this is that you need to use the annual exclusion amount to keep all transfers to the trust from being subject to the gift tax. But to use the annual exclusion, the transfers must constitute a present gift, not a future gift. To make the transfers present, you must give the beneficiaries the opportunity to withdraw the funds from the trust. The Crummey letter takes care of this and makes the transfer qualify for the exclusion.

Some people worry about these letters. Why even set up the trust if the beneficiaries can just take the money out on a whim? This is a reasonable question. But in reality, beneficiaries almost never withdraw funds from the trust. This is because the beneficiaries know that if they just play by the rules, you will keep depositing more money into the trust every year. It is in the beneficiaries’ best interest to leave the money alone and let you create wealth for them in trust. This is all explained to the beneficiaries before the trust set up.

Who needs a Crummey trust?

Crummey trusts are great tools for those who have an estate tax problem. They let you transfer assets out of your estate and escape the 40% tax on those assets after you die. This results in a lot more money passing on to your loved ones. To find out if you have an estate tax problem, speak with an estate planning attorney.

Where can I get a Crummey trust in Gainesville, FL?

To get a Crummey trust, you should visit a trust attorney with an understanding of the federal estate and gift tax rules. Blakely Moore is an estate and trust tax attorney practicing in the Millhopper area. He graduated from UF Law, where he learned from some of the most respected tax law academics in the field. If you live in or near Alachua County and want to talk about creating a Crummey trust, schedule a free consultation today.