After accounting for inflation, the unified gift and estate tax exemption is up from $11.7 million in 2021 to $12.06 million in 2022. Therefore, estate tax duty isn’t a concern for many families. On the other hand, some view the annual gift tax exclusion as a crucial estate planning tool. Considering potential future tax law changes that may reduce the gift and estate tax exemptions, including Crummey powers for your trust in an estate plan is still a wise choice. Here’s why.

Using the annual exclusion

The yearly gift tax exclusion permits you to send gifts to each recipient up to a particular value without paying gift tax. The cap is $16,000 per recipient for 2022. This sum is only adjusted by $1,000 increments for inflation.

As a result, you can give each of your seven grandkids $16,000 this year, for a total of $160,000, and pay no gift tax. That is true if you have three adult children and three other children. Since the exclusion applies to each donor separately, the sum is twice for married couples.

However, suppose you make an outright gift. In that case, there is a chance the recipient will waste the money or item. For example, especially if they are a minor or careless person. Alternatively, you can give assets to a trust and designate a kid as the beneficiary. In this arrangement, the named trustee looks after the assets until the child reaches a particular age.

There’s a catch, however. A gift must constitute a transfer of a “present interest” to be eligible for the annual exclusion. An unlimited right to the immediate use, ownership, or enjoyment of the property or its proceeds is what this definition means. A gift to the trust is not a gift of a current interest if specific clauses are absent from the trust agreement. Instead, it is a “future interest” gift, not covered by the annual gift tax exclusion.

Giving Crummey powers to a trust

A Crummey trust can help in this situation. It satisfies the rules for gifts of a present interest without requiring the trustee to distribute the assets to the beneficiary.

Usually, periodic transfers of assets to the trust in combination with immediate power allow the beneficiary to withdraw the transfer temporarily. The donor anticipates that there won’t be any exercise of power. The trust document cannot expressly state that. 

As a result, the donation to the trust might be viewed as a present interest gift thanks to the beneficiary’s restricted withdrawal right. It is therefore eligible for the annual gift tax deduction. However, remember that the tax’s outcome depends on whether the legal power exists rather than its use.

How to avoid pitfalls

For IRS acceptance, the beneficiary must have actual notice of the withdrawal right and a reasonable period to exercise it. Typically, a minimum of 30 days is needed. Contact our RRBB accountants and advisors for further information about using a Crummey trust.

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