There are two main types of strategies when it comes to estate planning and ensuring as much money gets from you to your beneficiaries as possible. The first strategy is to make accounts that are as tax-sheltered as possible so the transfer from you to the recipient goes mostly untaxed. The second strategy is to reduce your estate over time so the remaining estate doesn’t qualify for the larger tiers of taxation.
Both strategies are valid, and a combination of both is the best way to protect legacy wealth or start building mechanisms for legacy wealth in your family. The first strategy comes into play with vehicles like IRA trusts that are designed to give minimum withdrawals to the beneficiaries over long stretches of time. But when it’s time to focus on the second central strategy, turn to Crummey Trusts.
What are Crummey Trusts?
Crummey Trusts are accounts where you can give recipients up to $15,000 per year. $15,000 is the (current) annual limit on monetary gifts that you can give out before they’re taxed. When the money is put into a Crummey Trust instead of directly given, the money can’t be touched after an initial thirty-day period following each gift. Recipients can also only access the money that was just deposited, so prior years’ deposits can’t be touched. Instead, the money can only later be withdrawn once the recipient has reached a certain age, and it’s tax-free. Often, grandparents will create a Crummey Trust to make protected gifts for their grandchildren to be used when the grandchildren become adults.
What are the benefits of using Crummey Trusts?
Crummey Trusts are a great tool to use when giving gifts to minors or to others who are not financially capable of handling their own money. The Trusts allow the gifts of money to be managed by a trusted person while accumulating the funds for as long as necessary until a minor reaches adulthood or until someone without financial capability is able to get on their feet again. Additionally, tax-free gifts to the Crummey trust help reduce your estate so that you minimize any estate taxes upon your death, and the gifts to the trusts are protected from the trust beneficiary’s creditors.
Contact our team at Ford + Bergner LLP for more strategies to enhance your tax planning at any stage.