How Important Are Crummey Letters When Setting Up An Irrevocable Trust?

An important way to reduce taxes on your estate is to make gifts to your loved ones during your life. This is done with the annual gift tax exemption of $16,000 as of 2022. You can make a gift to your loved one up to the current exemption amount every year. You can give that amount to family and friends. This means you can provide $16,000 to several grandchildren annually.

More information about this process is included below, including the issue of Crummy letters for establishing an irrevocable trust. If you have questions, speak to our Lincolnshire estate planning attorneys at Orlowsky & Wilson.

What Is A Crummey Trust?

Crummey trusts are helpful estate planning tools for people with high net worth who want to reduce estate and tax. Crummey trusts can help people with larger estates to minimize taxes. The trust can be used to make funds in the trust eligible for the yearly gift tax exclusion.

This power provides the right to take out assets from the irrevocable trust to the beneficiaries. However, the power is not supposed to be used. Instead, it is intended to make an ineligible gift eligible for the yearly gift tax exclusion.

To qualify for the yearly gift tax exclusion, the gifts must represent a present interest. When the Crummey trust is created, you can make a provision letting the beneficiaries take out assets in a certain period. For instance, you may allow them to take out assets in one month after the trust is created.

The annual gift tax exclusion is only made official if a Crummey letter is sent according to IRS rules. Without those guidelines followed, you will not reduce your taxable estate upon your death.

Crummey Letter Overview

A Crummey letter is a written document detailing what the Crummey power is being given to beneficiaries so the funds are eligible for the gift tax exclusion. The IRS mandates that Crummey letters be sent to trust beneficiaries, so the Crummey notice is vital. First, however, some rules must be followed:

  • When gifts are put into the trust, the Crummey notice must be delivered to beneficiaries.
  • The letter must state the amount of the gift.
  • The Crummy letter must inform each beneficiary that they can take out money from the trust and do so immediately.
  • It must detail how long they have to withdraw the funds.
  • The Crummey letter also must tell the beneficiary if they do not use the right, the funds stay in the trust.
  • The trustee must draft the letter and ensure a copy is mailed to each beneficiary. Without the Crummey letter, the gift will be completed according to IRS rules.

The Crummey letter cannot tell the beneficiary that they cannot take money from the trust in the given time. Also, if the notice suggests that the beneficiary cannot use their Crummey power, the money does not qualify for the gift tax exclusion.

Speak To Our Lincolnshire Estate Planning Attorneys

If you need help with Illinois estate planning, our attorneys can assist you with Crummey letters when setting up your irrevocable trust. Crummey letters must be handled appropriately, or the gift tax exclusion will not apply. Contact our Lincolnshire estate planning attorneys at Orlowsky & Wilson at (847) 325-5559 for assistance.

Updated as of July 2019
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