What Are the Pros and Cons of a Crummey Trust?

PiggyBankWe recently talked about the benefits of establishing a Crummey Trust to avoid estate taxes and gift taxes. In this article we’ll discuss the pros and cons of a Crummey Trust in more detail.

The primary benefits of a Crummey Trust are as follows:

  • The beneficiary can’t take the property and dissolve the trust at age 18 or 21, unlike 2503(c) Minor’s Trusts or UGMA/UTMA accounts. (Unless that is the age you designated for distribution, which is not generally recommended.) The trust can continue for as long as you specified in the trust documents.
  • The trust can be established for multiple beneficiaries, including beneficiaries who have already reached age 21.
  • While the beneficiary must be given the right to withdraw contributions to the trust for 30 days, few beneficiaries will do so if you make it clear contributions will cease thereafter.
  • A beneficiary who decides to withdraw a contribution anyway can only take  the most recent contribution, not the entire trust.

If the trust allows distributions for a beneficiary’s health, education, maintenance or support, the trustee can make distributions for these reasons at any time. So, essentially, a well-informed beneficiary can request a distribution instead of ruining the plan by withdrawing the latest gift.

The main disadvantages of a Crummey Trust are:

  • The beneficiary must be notified in writing of his or her right to withdraw a gift each time a gift is made to the trust, which is usually annually. If the trustee drops the ball and forgets to notify the beneficiary, then the gift won’t be exempt from taxation.
  • The trust is considered an asset of the child for college financial aid purposes.
  • If you, the donor, acts as a trustee, the trust will be included in your gross taxable estate. This may defeat at least part of the purpose of setting up the trust in the first place. This problem can be avoided by making the  trustee someone other than you or your spouse.
  • A beneficiary may not cooperate for various reasons.
  • Although the trust has a separate taxpayer identification number and files an annual tax return, the beneficiary must in most cases pay income tax on the trust’s income, such as interest and dividends.

In a later article, we will discuss how a traditional Minor’s Trust can be combined with a Crummey Trust to maximize the benefits and longevity of a trust.

For more information about a Crummey Trust, Minor’s Trust or any other estate planning need, call an experienced will and trusts lawyer at the Peterson Law Group.  Our experienced Conroe, Texas attorneys help clients develop comprehensive estate plans. Call us at 936-337-4681 or 979-703-7014 or contact us online to arrange an appointment.

About Chris Peterson

Chris Peterson is an attorney and the owner and founder of Peterson Law Group, a Texas law firm with offices in Bryan/College Station and Kingwood. He mainly practices in the areas of Estate Planning and Business Planning. Chris is also a Certified Estate Planner. Besides his law practice, Chris is a serial entrepreneur and community volunteer. He is known for his cutting edge law practice that utilizes technology to deliver efficient, excellent work.