There are advantages and disadvantages with Crummey trusts.
College-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. E-mail your questions to firstname.lastname@example.org.
In my July column, I compared 529 savings accounts with Uniform Transfers to Minors Act accounts and, in my August column, I compared 529 savings accounts with gifts to 2503(c) trusts. This month I will compare 529 savings accounts with another alternative way of making gifts to minors: gifts to Crummey trusts that are each established for a single beneficiary.
Background: Usually gifts to a trust do not qualify for the gift tax annual exclusion because the trust beneficiary does not have the "present interest" required for the gift tax annual exclusion. Typically, a trust beneficiary only has a future interest in the trust property. However, the case of Crummey v. Commissioner, 397 F.2d 82 (9th Circuit 1968) established that a present interest is created if the beneficiary of a trust has a right to withdraw contributions to the trust when made. Thus annual exclusion gifts to a Crummey trust will qualify for the gift tax annual exclusion. Such gifts will also qualify for the GST annual exclusion provided that the beneficiary is the sole beneficiary of the trust during such beneficiary's life and the trust will be included in the beneficiary's estate upon the beneficiary's death. Usually when a trust is established for a grandchild or other skip person, the beneficiary is given a power to appoint the trust assets at death to anyone, including the beneficiary's estate or creditors, to ensure that the trust will be included in the beneficiary's estate and that contributions to the trust will therefore qualify for the GST annual exclusion.
When a Crummey trust is established for a single beneficiary, typically the rights to withdraw contributions to the trust lapses after a particular period of time, such as 60 or 90 days. If the beneficiary does not have a power of appointment over the trust assets that would prevent a gift from being completed, then when the beneficiary's right to withdraw a contribution lapses, the beneficiary would be deemed to have made a gift to the trust to the extent the lapse in any year exceeds the greater of $5,000 or 5% of the trust assets. To avoid any gift from the beneficiary to the contingent remainder beneficiaries of the trust when the right of withdrawal lapses, typically the beneficiary is given a power to appoint the trust assets upon his or her death, which causes the lapse of the right of withdrawal to be only an incomplete gift and therefore not subject to gift tax.
The trust may permit discretionary income and principal distributions to the beneficiary. Alternatively, the trust may require certain mandatory distributions to the beneficiary, such as the distribution of net trust income after a certain age or the distribution of a certain percentage of the value of the trust assets to the beneficiary each year. The trust may provide for a particular age or ages at which the trust will distribute to the beneficiary or, alternatively, at which the beneficiary will have the right to withdraw the trust assets.
Beneficiary: A Crummey trust for a single beneficiary may have only one beneficiary by definition. The beneficiary may be of any age. The beneficiary of a Crummey trust for a single beneficiary may not be changed. In contrast, the beneficiary of a 529 savings account may be changed to a member of the family of the old beneficiary.
Trust Investments: Unless the trust restricts the Trustee's powers, generally the trust property may be invested in any manner, including in stocks, bonds, mutual funds, cash accounts, partnership or LLC interests, etc. The prudent investor rule of the appropriate state applies to trust investments. In contrast, 529 savings accounts may only be invested in the investment choices offered by the particular state plan.
Distributions: The Trustee, like the account owner with respect to a section 529 savings account, controls distributions subject to the terms of the trust. The trust structure, however, gives the grantor of the trust greater flexibility to specify the circumstances under which the grantor would or would not want the Trustee to make distributions to the beneficiary.