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Those readers not already familiar with Crummey powers, are probably wondering: what in the world is a Crummey power, and how did it get such a strange name? The name comes from a court case, Crummey v. Comm’r., 397 F2d 82, (9th Cir. 1968), in which the taxpayer’s last name was Crummey. Here’s what the case was about:
The Gift Tax Exclusion
Current gift tax law allows any donor to transfer up to $15,000 per year per donee, to an unlimited number of donees, free of gift tax. In the case of a married couple as donors, this exclusion can be effectively doubled, to $30,000 per donee, if both spouses join in the gift. However, in order to qualify for the exclusion, the interest received by the donee must be a present interest in the property; a future interest will not qualify. For example, if money is gifted to a trust in which A is entitled to the income for a period of years, and thereafter the property passes outright to B, even if B’s remainder interest has a present value of $15,000, it will not qualify for the exclusion, since it is not a present interest in the property. B does not have the right to the immediate use, possession, or enjoyment of the property.
Life Insurance Trusts and Crummey Powers
The ownership of a life insurance policy by an irrevocable trust created and funded by the insured is a popular estate planning technique which permits beneficiaries to receive substantial sums upon the death of the insured, free of estate tax. The insured/grantor typically makes cash gifts to the trust to provide the funds for the annual premium payments on the policy, and these gifts are potentially subject to gift tax. The $15,000 annual per-donee exclusion is not available with respect to these gifts to the trust; since the money is not immediately available to the trust beneficiaries, but must be used for insurance premium payments, these are considered gifts of future interests, and only gifts of present interests qualify for the exclusion.
How to convert premium-payment gifts into gifts of present interests.
Some years ago a clever tax planner for the Crummey family drafted a trust provision which sought to convert gifts of premium-payment monies into present interest gifts which would qualify for the annual exclusion. The plan works as follows (assuming, for example, that the insurance trust provides that upon the grantor’s death the insurance proceeds are to be held by the trustee with income distributions to the surviving spouse for life, then the principal to be divided equally between the grantor’s three children): If the annual insurance premium were $15,000, the grantor would pay this amount each year to the trust. Upon receipt by the trust, each of the three children would be given a right, exercisable during a limited time period, to withdraw one-third of the cash gift and pocket the money. If the power to withdraw is not exercised within the designated time period, the right would lapse. Assuming that none of the three power holders exercises his/her withdrawal right, the trustee would then use the funds for the premium payment.
By giving each beneficiary at least a time-limited right to withdraw a portion of the cash gifted to the trust, a present interest is created with respect to the withdrawable amount–in our example, $5,000 for each beneficiary–even though the withdrawal right is not exercised and eventually lapses. Thus, the entire $15,000 annual premium-payment gift will qualify for the gift tax exclusion! This is the technique which was litigated and sustained in the Crummey case. Thereafter, the creation of such withdrawal powers became a widely used estate planning technique, and because it is based upon the decision in the Crummey case, these powers became known as Crummey powers.
See also: Wealth Transfer Taxes (in 6 minutes)