A Crummey trust permits you to make gifts to trusts for children (or others) and qualify for the valuable benefit of having the gift protected by the annual gift tax exclusion. The Crummey power is necessary so that a gift to a trust will be considered a “gift of a present interest.”
Many people choose this trust if their motivation is to create an estate for their survivors (through annual gifting) and to discourage the beneficiaries (or their spouses) from squandering the assets.
Through a Crummey Trust, an individual is able to reduce the size of their taxable estate while at the same time passing assets to the next generation. If he/she makes gifts to the trust of $12,000 or less this will qualify for the annual gift tax exclusion and none of their $1,000,000 credit shelter will have to be used, so they can save it until their death. This results in more wealth being protected from taxes.
There is a problem when someone makes a gift to a trust. The annual $12,000 gift tax exclusion only applies to gifts of a PRESENT interest and not gifts of a FUTURE interest. This means that a gift to a trust would not qualify for the $12,000 gift tax exclusion because many trusts do not give the beneficiary an unrestricted, immediate right to the money. The Crummey Trust is designed to avoid this problem. It does so because the trust is irrevocable meaning the trust cannot be revoked and any assets put into the trust cannot be taken out.
The trust beneficiaries are permitted only a short period of time in which they can withdraw the money. This right to withdraw the money must be told to the beneficiaries in a formal letter each year.
The use of this trust requires absolute compliance with the law.