A Crummey Trust is a specialized type of irrevocable trust used in estate planning to take advantage of the annual federal gift tax exclusion — while still keeping assets in trust.
It’s commonly used in:
- Life insurance planning
- Wealth transfer strategies
- Gifting to children or grandchildren
- High-net-worth estate planning
Despite the unusual name, a Crummey Trust is a powerful and widely used tool.
Why Is It Called a “Crummey” Trust?
The name comes from a court case (Crummey v. Commissioner) that approved the strategy of giving beneficiaries temporary withdrawal rights in order to qualify gifts for the annual gift tax exclusion.
The Problem a Crummey Trust Solves
Each year, you can give up to the annual exclusion amount (set by federal law) per recipient without triggering gift tax or using your lifetime exemption.
However:
- Gifts to a trust are generally considered “future interests.”
- Future interest gifts normally do not qualify for the annual exclusion.
A Crummey Trust solves this problem.
How Does a Crummey Trust Work?
A Crummey Trust includes a special provision called a “Crummey withdrawal power.”
Here’s how it works:
- You contribute money to the trust.
- The beneficiary is given a limited window of time (often 30–60 days) to withdraw that contribution.
- If the beneficiary does not withdraw the funds within that window, the right lapses.
- The funds remain in the trust under the terms you established.
Because the beneficiary technically has the present right to withdraw the gift, it qualifies for the annual gift tax exclusion.
Example
Let’s say:
- You want to fund a life insurance policy owned by a trust.
- You contribute $18,000 to the trust (for example, the annual exclusion amount).
- The beneficiary receives notice that they may withdraw that $18,000 within 30 days.
- They choose not to withdraw it.
- The funds remain in the trust and are used to pay insurance premiums.
You’ve now successfully made an annual exclusion gift — without giving the money outright.
Why Are Crummey Trusts Often Used With Life Insurance?
Crummey Trusts are frequently paired with Irrevocable Life Insurance Trusts (ILITs).
This allows:
- Premium payments to qualify for the annual gift tax exclusion
- Insurance proceeds to remain outside of your taxable estate
- Long-term wealth transfer planning
The Crummey power makes the annual contributions tax-efficient.
Key Benefits of a Crummey Trust
Maximizes Annual Gift Tax Exclusion
Allows you to make tax-efficient gifts into a trust.
Keeps Assets Protected
Funds remain in trust instead of passing outright to beneficiaries.
Control Over Distribution
You decide how and when beneficiaries receive assets.
Estate Tax Reduction
Removes assets from your taxable estate.
Important Requirements
For a Crummey Trust to work properly:
- Beneficiaries must receive written notice of their withdrawal right (often called a “Crummey notice”).
- The withdrawal period must be reasonable.
- Proper documentation must be maintained.
- The trust must be irrevocable.
Failure to follow these steps can jeopardize the tax benefits.
Are There Any Downsides?
- Beneficiaries technically have the right to withdraw the gift.
- Administrative requirements must be followed annually.
- It adds complexity to trust management.
- Not necessary for smaller estates.
Careful drafting and administration are essential.
Who Should Consider a Crummey Trust?
Crummey Trusts are often appropriate for:
- High-net-worth individuals
- Families funding life insurance trusts
- Those making regular gifts to children or grandchildren
- Individuals seeking advanced estate tax planning strategies
They are generally unnecessary for modest estates that are unlikely to face estate tax exposure.
The Bottom Line
A Crummey Trust is a sophisticated estate planning tool that allows you to take advantage of annual gift tax exclusions while keeping assets protected inside a trust.
While highly effective, it requires proper drafting, administration, and ongoing compliance.
If you are exploring advanced estate tax planning strategies, a Crummey Trust may be worth discussing as part of your long-term wealth transfer plan.
