Generally, the first and foremost reason for creating a trust in Texas is the desire to benefit other people— either family members, friends, charities, or the like. When trusts are established during someone’s lifetime, the creation of the trust generally means that the Grantor is giving property (money, stocks, real estate, etc.) to the trust and is thereafter not able to use the property for their own purposes.
While the potential trust Grantors might desire to give a gift for the beneficiaries of the Trust, the same Grantors typically want to ensure that the gift during their life is not going to cause them adverse tax consequences. When you think about it, we can all appreciate that most people are not going to want to give away their money and pay taxes for having given the money away.
Historically, the laws related to trusts said that gifts made to trusts were subject to gift taxes, which meant that the person giving the gift to the trust was required to pay taxes on the amount of money given to the trust. Obviously, this discouraged most people from wanting to give money into trusts for their children or grandchildren.
Example: Husband and Wife desire to place $50,000 into a trust for the benefit of their 5 grandchildren. They want this money to be used to help pay for college education for each of the 5 grandchildren. However, Husband and Wife do not want to pay any taxes for having given away the $50,000.
In a very famous case decided by the U.S. Supreme Court, the Crummey Trustprovisions emerged. The trust provisions, derived from the name of the Court case, Crummey v. Commissioner, essentially establish that certain trusts can qualify to receive gifts from grantors who may avoid paying gift taxes on all or a portion of the gift made to the trust.
If you review the section of our website devoted to the Gift Tax, you will recall that each individual is entitled to give away up to $12,000 each year to as many people as they wish without having to pay any gift taxes. This amount is known as the “annual exclusion” from gift taxes.
In Crummey trusts, the beneficiaries of the trust are deemed to have received the gift (and therefore qualify for the annual gift tax exclusion) if each beneficiary is given a limited right to withdraw the gift from the trust after it is made. Once the gift has been made, the trustee of the trust must send letters to the trust beneficiaries and offer them the right to withdraw a certain portion of the gift for a stated period of time (as short as 30 days from the date of the gift). If the beneficiary does not withdraw the money during that time, then the money remains in the trust and is managed according to the provisions of the Trust.
In the example above, Husband and Wife can each give $12,000 to each of their 5 grandchildren. However, they have chosen to give $10,000 to each one. As a result, they can apply their annual exclusion gift to those gifts, which means that Husband and Wife do not have to pay gift taxes as a result of the gifts. However, they need to make sure that the Trustee of the trust sends out the letters giving the grandchildren the right to withdraw the money.
The creation of a proper Crummey Trust requires particular expertise to ensure that the Trust correctly qualifies for the gift tax exclusion. Likewise, the creation of the Trust requires competent advice related to the requirements of the withdrawal letters. The attorneys at Ford+Bergner LLP can provide this advice and are glad to assist our clients in evaluating the usefulness of a Crummey Trust in their overall estate plan.