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estate planning

You may want to set up a trust that lets you make a gift of up to $12,000 each year that your beneficiaries can remove and use for health, education, maintenance and support. Thanks to a taxpayer named Crummey who petitioned the court, you can, but with some provisions.

Most trusts are set up for the benefit of children, grandchildren or other relatives, and the grantors may each wish to give up to $12,000 every year to a trust. While the trust often provides for payments for health, education, maintenance and support, and the beneficiaries receive their share of the trust’s assets when they reach age 21, 25 or some other age, most trusts do not qualify for the $12,000-per-year gift tax exemption. To qualify, the gift must be considered by the Internal Revenue Service as a gift of “present interests.” Such a gift is one given to the recipient right now with or without any restrictions. However, if the gift is one that is tied up until the recipient is age 21, it is a gift of “future interest” and will not qualify for the $12,000-per-year tax exemption.

In order for the trust to qualify for the $12,000 per year gift tax exemption, “Crummey” provisions must be placed in the trust when it is established. These provisions permit the beneficiary a limited period of time (such as 30 days) to revoke the trust and remove the current gift. If the beneficiary fails to revoke the trust and remove the gift during this window, he or she may not do so later. This feature, the period of time when the beneficiary can remove the $12,000 gift, changes the future gift to a present gift and qualifies it for the annual $12,000 exemption.

In the example of our hypothetical couple, Steve and Sherry Sample, they establish an irrevocable trust for their three children with a friend named as the trustee. Every year they each gift $12,000 to each child for a total of $72,000. The trustee notifies the children after the gifts are received, letting them know they have 30 days to notify the trustee and revoke the gift or their right to do so will expire. If the beneficiary does not exercise the temporary revocation of the trust, the gift will remain in the trust until it goes to the child at age 35.

With these deposits, over a ten-year period the parents can gift a total of $720,000, and over $300,000 can be saved in total estate or “death” taxes. Irrevocable trusts with “Crummey” provisions are one tool that can be used in estate planning, and work very well in certain situations, but may not be ideal for everyone.

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