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Many people wish to set up a trust for children, grandchildren, or other relatives. They then wish to give up to $11,000 per year per person to the trust. The trust frequently provides payments may be made for health, support, maintenance, and education, and the beneficiary receives his share of the trust assets at age 25, 30, 35, or some other age. The problem is that such a trust does not qualify for the $11,000 per year gift tax exemption.
To qualify for the $11,000 per year gift tax exemption the gift must be one referred to in the Internal Revenue Code as a gift of a "present interest." A gift of a present interest is one given to the recipient right now without restrictions, or locked up until age 21, subject to certain restrictions. If the gift is "tied" up until after age 21, it is a gift of a "future interest" and does not qualify for the $11,000 per year exemption.
How do you qualify such a trust to allow the $11,000 per year exemption? One way is to place provisions in the trust regarding what is referred to as "Crummey" provisions. These provisions relate to a tax court case in which the petitioner was a taxpayer named Crummey.
"Crummey" provisions allow the beneficiary to revoke the trust and to remove the current gift for a limited period of time, such as 30 days. If the gift is not revoked, then the recipient may not later revoke the trust and remove the gift. By creating a window whereby the beneficiary can remove the $11,000 each year, this converts the future gift to one of a present gift and qualifies for the annual $11,000 exemption.
John and Mary Doe set up an irrevocable trust for their three children. They name a friend as the trustee. Each year they give $11,000 per child to the trust for each of them, or $66,000 per year. After each gift is made, the trustee writes a letter to each child telling the child that he has 30 days to notify the trustee and revoke the gift. If the gift is not revoked within 30 days, then the child's right to later revoke it expires. The trustee can use assets of the trust for each child's health, support, maintenance and education. Any assets left in the trust goes to the child at age 35.
Over a 10 year period the parents can give $66,000 per year, or a total of $660,000 to the trust. The total estate tax savings may be as high as $297,000.
Irrevocable trusts and trusts with Crummey provisions are not for everyone, but work well in certain situations. They are one tool in connection with estate planning.
İMilton Berry Scott, 2005