Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Crummey Letter====== A Crummey Letter (also known as a 'Crummey Notice') is a legal notice sent to the beneficiary of a trust, informing them of their right to withdraw a recent contribution. At first glance, this might seem like a simple piece of administrative mail, but it's a powerful key that unlocks a major tax benefit. In the world of [[estate planning]], gifts to a trust are often considered gifts of a "[[future interest]]" because the beneficiary can't access them right away. The problem? The hugely valuable [[annual gift tax exclusion]]—which allows you to gift a certain amount to anyone each year completely tax-free—only applies to gifts of a "[[present interest]]". The Crummey Letter cleverly solves this by giving the beneficiary a temporary, unrestricted right to withdraw the funds (usually for 30 days). This short window of opportunity magically transforms the gift into a present interest, allowing the person funding the trust (the [[grantor]]) to avoid paying [[gift tax]] on their contributions. It's a cornerstone technique for tax-efficiently funding an [[irrevocable trust]], especially an [[ILIT]] (Irrevocable Life Insurance Trust). ===== Why a "Crummey" Letter? A Peculiar Name for a Powerful Tool ===== The name isn't a comment on the quality of the letter; it comes from a landmark 1968 U.S. tax court case, //Crummey v. Commissioner//. The Crummey family created a trust for their children, some of whom were minors. They wanted to make annual contributions to the trust without triggering gift taxes. The [[IRS]] argued that because the children couldn't immediately use the funds, the gifts were of a future interest and thus taxable. However, the trust document gave the beneficiaries the power to demand a distribution each time a contribution was made. The court sided with the Crummeys, ruling that this demand right—even if temporary and unlikely to be used—was enough to qualify the gift as a present interest. This ruling established the "Crummey power," and the notice that informs beneficiaries of this power became known as the Crummey Letter. It’s a classic example of a legal "fiction" that has very real and very valuable financial consequences. ===== How Does It Work in Practice? ===== Think of the Crummey Letter as a formal "limited-time offer" that no one is expected to accept. The process is a well-choreographed dance between the grantor, the trustee, and the beneficiary. ==== The Gifting Process ==== It starts when a grantor decides to transfer assets—cash, stocks, or other property—into an irrevocable trust. This is common for parents or grandparents wanting to set aside wealth for their descendants. For instance, they might want to fund an ILIT, which will use the money to pay premiums on a life insurance policy, creating a large, tax-free death benefit for the family later on. ==== The Notice (The Letter Itself) ==== Once the gift is made to the trust, the trustee has a critical job: they must immediately send a Crummey Letter to each [[beneficiary]]. This letter must state: * The amount of the contribution made on their behalf. * That they have the right to withdraw that amount (up to the annual gift tax exclusion limit). * The specific, limited timeframe they have to exercise this right (e.g., 30 or 60 days). ==== To Withdraw or Not to Withdraw? ==== Here's the crucial part: for the strategy to work, the beneficiaries must //not// withdraw the money. The entire plan is based on the assumption that the funds will remain in the trust to grow or to pay insurance premiums. A beneficiary who exercises their withdrawal right could derail the grantor's long-term estate plan. It's an unwritten understanding: the right is given only to secure the tax benefit, not to be acted upon. If a beneficiary did withdraw the funds, the grantor would likely stop making future gifts to the trust for that person. ===== The Investor's Angle: Why Should You Care? ===== While it sounds like a tool for the ultra-wealthy, the principles behind the Crummey Letter are relevant for any serious long-term investor looking to build and preserve generational wealth. ==== Supercharging Your Gifting Strategy ==== The Crummey power lets you leverage the annual gift tax exclusion for multiple people, year after year. Let’s say the annual exclusion is $18,000. A couple could jointly gift $36,000 per recipient. If they have three children who are beneficiaries of a trust, they can contribute up to $36,000 x 3 = $108,000 to the trust //each year// completely free of gift tax, provided the proper Crummey notices are sent. Over a decade, that's over $1 million transferred to a trust, where it can be invested and grow outside of their taxable estate. This is a powerful way to move significant value to the next generation without a big tax bill. ==== A Tool for the Value Investor's Legacy ==== Value investing is about patient, long-term capital accumulation. The Crummey strategy is a perfect match for this philosophy. It’s not a get-rich-quick scheme; it's a methodical, disciplined tool for ensuring the wealth you carefully build is passed on efficiently. By using a trust funded with Crummey gifts, you can protect assets from creditors, ensure they are managed wisely for your heirs, and dramatically reduce or eliminate [[estate tax]] liability. It’s about securing the long-term value of your life's work for your family. ===== Potential Pitfalls and Considerations ===== While powerful, the Crummey strategy is not without its risks and must be executed perfectly. * **The "Naked" Crummey Power:** The IRS can disallow the tax benefit if it believes the beneficiary's right to withdraw is an illusion. For example, if the notice is not actually sent, the beneficiary is not aware of their right, or there isn't enough liquid cash in the trust to satisfy a withdrawal request, the IRS might challenge the arrangement. * **The Rogue Beneficiary:** There is always a small risk that a beneficiary—perhaps one who is young, in financial trouble, or estranged from the family—will actually demand the money. This is legally their right, and the trustee must comply, which can disrupt the entire financial plan. * **Administrative Hassle:** This isn't a "set it and forget it" strategy. A Crummey Letter must be properly drafted and sent for //every single contribution//, for //every single beneficiary//, every year. Failing to do so can invalidate the tax exclusion for that gift. This requires meticulous record-keeping and is often best handled by a professional trustee or an attorney.