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Are You a Crummey Advisor or Just a Crummy Advisor?

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Are you a “crummy” or a “Crummey” advisor?

Crummy is defined as dirty, run-down, tacky, worthless or just plain lousy. On the other hand, if you’re a “Crummey” advisor, that’s a good thing – especially if you’re making “Crummey” recommendations to your high-net-worth (HNW) clients. 

Let me explain what I mean about making “Crummey” recommendations. A “Crummey Trust” is used when a parent wants to make lifetime gifts to his or her children, free from gift or estate taxes.

As long as the gift amount is equal to or less than the annual IRS gift tax exclusion amount (currently $14,000 per year per person or $28,000 per couple), the money remains gift- and estate-tax free. With such a trust, the family can continue funding it with the annual maximum gift tax exclusion, and the children will have access to it at some point, depending on the trust’s actual provisions.

A key point of advice for your clients is that for the annual gift tax exclusion to apply, the recipient (e.g., a child) must have received a “present interest” gift. A present interest gift implies that someone has full control to spend the gift if they choose. Therefore, in our above situation, the child has to be notified of the gift (usually in writing), and have access to the money immediately to qualify as a present interest gift rather than a future interest gift.  

A Crummey trust strategy (named after Clifford Crummey, the first client to use such a vehicle) allows the gift to be placed in a trust in which the recipient is notified (usually by letter, stipulating a timeframe of at least 30 days), and has legal access to spend the gift.

 By allowing and using these so called “Crummey powers,” the gift legally qualifies for the annual gift tax exclusion. Therefore, a Crummey letter is very important to the process, and something that must be sent immediately after the gift is contributed to the trust; otherwise the present interest qualification will not legally apply.

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For the strategy to work, however, it’s also very important that the childr(en) not exercise/spend his/her/their present interest gift, so the money stays in the trust and bypasses future gift or estate tax issues which may arise. The recipient may later decide to use some of the money; although he or she only has access to the most recent gift; all previous gifts remain part of the corpus of the trust.

So where and when are these types of trusts most commonly used?

The most common use of Crummey trusts/powers is in Irrevocable Life Insurance Trusts (ILIT). In this case, the life insurance policy is owned by the ILIT, rather than by the individual, which allows for its death claim benefit to never compound the individual’s taxable estate. 

ILITs require premium payments on the insured, usually handled through what’s called Crummey powers, mentioned above. The insured makes gifts of the premium payments to the trust, and, as the beneficiaries of the trust choose not to exercise their rights to withdraw funds (usually within 30 days), the current interest gift is then excluded from gift and estate tax each year, while actually paying the life insurance policy premiums.

Again, the key to this tax exclusion strategy is making sure clients take care of preparing the Crummey powers/letters, which are proof in writing that beneficiaries had the right to a present interest gift, rather than only a future interest gift.

Given that our clients look to us to help them transfer their wealth as tax-efficiently as possible, I believe one of the best things we can do is strive to become the “Crummey-est” advisors ever to our HNW clients! I can promise you – they’ll appreciate it.