Given the state of gridlock in Washington, with a GOP-controlled Congress and Democratic White House working in opposition to each other, most proposals form one side or another can be considered dead on arrival. In that state of affairs, it’s the most easily overlooked provisions that sometimes have the best chance of sneaking through to passage.
President Obama’s 2015 budget contains a change to the little-known Crummey powers, which allow people to put assets into certain trust without invoking gift taxes. This is the kind of low-priority change that might actually get through Congress — and that could significantly impact some estate planning clients.
Crummey powers give a trust holder the right to make gifts to his or her trust that are excluded from gift tax, up to the $14,000 annual limit per gift. To have those payments count as gifts rather than as assets that have been put into the trust, the trust holder agrees to set up a window in which the trust’s beneficiaries are entitled to withdraw those amounts. Without establishing that Crummey power, all gifts made to an irrevocable trust will be subject to gift tax.
Trust holders are currently allowed to give as many as $14,000 gifts to a trust per year as they so choose, as long as each gift recipient gets the Crummey powers to withdraw the funds. The budget proposal would change that to an annual limit of $50,000 per donor.
This proposal is primarily intended to curb contributions to pay insurance premiums on trusts that hold life insurance. As a report from the law firm Katten Muchin Rosenman notes, “The ability to use essentially unlimited numbers of individuals named as Crummey Power holders to absorb the cost of insurance premiums on trust-owned life insurance (so long as the individual has a contingent remainder interest in the trust) has long been viewed as abusive by the Internal Revenue Service.”
Crummey powers are not widely reported on, but they are a key tactic for many people establishing irrevocable trusts. In addition to using it to fund insurance, those gifts to the irrevocable trust can reduce the size of the final estate, reducing or averting estate tax. If they incur gift tax, those benefits are obviously reduced.
Crummey rights are already very limited. When a trust holder makes a “gift” of funds to an irrevocable trust with Crummey powers, the trustee must then give adequate notice to beneficiaries, alerting them that the funds may be withdrawn.