Save your Annual Gift Exclusion every year in a Crummey Trust

You can use your annual exclusion amount every year, and provide guidance and instruction on how the funds will be used to benefit members of your family. An annual exclusion trust, also known as a Crummey Trust, is one way to do this. The name "Crummey Trust" comes from a court case, Crummey v. Commissioner. The judges who decided the Crummey case explained how taxpayers can use their annual gift tax exclusion to transfer money to a trust fund that does not become part of their taxable estate.

Ever since then, the courts have recognized that if the trust instrument gives a beneficiary the power to demand immediate possession and enjoyment of corpus or income, the beneficiary has a present interest, and the money given to the trust fund is not a part of the donor-taxpayer's estate. When this arrangement is used to own a life insurance policy, the trust is known as an Irrevocable Life Insurance Trust (ILIT). But life insurance is not the only type of asset that can be owned by an annual exclusion trust.

To qualify as a Crummey trust, the Trustee must give each beneficiary written notification of his or her right to withdraw some or all of the contributions to the trust, within a period of time that satisfies the requirement for a gift of a "present interest." But if the beneficiary's power to withdraw the gift is "make believe" or illusory, and effectively deprives the beneficiary of the power to withdraw, the gift to the trust does not qualify as a present interest that is eligible for the gift tax annual exclusion under section 2503(b).

Section 2503(c) gives guidance to people who want to transfer funds to a Crummey Trust for the benefit of minor. No part of a gift to an individual who has not attained the age of 21 years on the date of such transfer shall be considered a gift of a future interest in property if the gift:

1. may be expended by, or for the benefit of, the donee before his attaining the age of 21 years, and
2. will to the extent not so expended— (A) pass to the donee on his attaining the age of 21 years, and (B) in the event the donee dies before attaining the age of 21 years, be payable to the estate of the donee or as he may appoint under a general power of appointment as defined in section 2514 (c). The Trust can be designed to continue past a young beneficiary's 21st birthday, as long as the beneficiary is allowed to compel distribution, or extend the term of the Trust.