What is a Crummy Trust?

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Paul Sundin, CPA

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By now you are probably well aware of the gift tax exclusion. But let’s take it to the next level. Have you heard of a Crummy Trust?

The best way to structure the gifts is to establish a crummy trust. Simply stated, it is an irrevocable gift trust which provides that the beneficiary (child/grandchild) has the right to withdraw the gift for a 30-day period after the gift is made to the trust. The child, or the parent acting on behalf of the minor child, has the legal right to make the withdrawal. The right is for a limited period. If the child does not exercise the right of withdrawal within 30 days, then the right lapses.

This concept takes its name from a court case lost by the IRS. In the case, the taxpayer wanted to set up a trust for several beneficiaries and take advantage of the $15,000 (in 2020) annual exclusion. While the taxpayer could have simply made outright gifts, he or she wished to do it through a trust that would discourage the beneficiaries from spending the gifts immediately.

However, making gifts to a trust presents problems when one also wants to take advantage of the annual exclusion. The annual exclusion requires that any excluded gifts must be present interests, not future – as in a trust.

A Crummey trust is meant to overcome this problem. Under this estate planning tool, gifts are made to an irrevocable trust. The beneficiaries are given only a short period of time each year to withdraw the gift from the trust. If they do not make such a withdrawal the funds remain in the trust and are administered pursuant to its terms. The result is hopefully the use of the annual exclusion with subsequent control of the funds by the trust.

The right is generally non-cumulative. If the child decides to exercise the right of withdrawal in year two, the child can withdraw only the property given to the trust in year two (and not the property given to the trust in year one).

To this extent, a crummy trust is a form of trust that is created for the benefit of an individual or individuals such that gifts are made in a way that excuses them from the unified gift and estate tax. In the United States, estate tax describes a form of tax that is subjected to the transfer of the estate of a deceased person. 

This tax applies to the property passed from the grantor to the beneficiaries by way of a will for cases of testacy or under the laws and rules of intestacy. In essence, the estate tax is a component of the unified gift and estate tax, whose other component is the gift tax. Gift tax is invoked as regards the transfer of assets during one’s life.

Origin of a Crummy Trust

Clifford Crummy was the first taxpayer to use this tool (hence the term crummy). The IRS attempted to deny him the annual gift exclusion.

The term crummy was derived from the United States case of Crummy et al. v Commissioner of Internal Revenue, 397 F.2d 82, (9th Cir. 1968), where the court held that the petitioners case were entitled to claim the gift exclusion because the postponement of enjoyment could not constitute a future interest if such postponement were primarily attributed to the beneficiaries’ minority. 

The Applicability of the Trust

As a matter of general principle, gift tax exclusion is inapplicable to gifts made in trust. It is upon this principle that the rules of establishing a crummy trust are premised. According to the IRS requirements, there must be proof of a ‘present interest’ in the gift for the tax exclusion to suffice. 

It is also the law that the beneficiary should be accorded immediate access to the gift in trust. The only limitation to this provision is the beneficiary’s age, as immediate access should only be initiated where the beneficiary is over 18 years.

However, the crummy trust allows the beneficiary to invoke withdrawals of the gift within a specified period. This is usually 30 days, but the same can vary depending on the circumstances of each case. The allowed period can therefore be extended to 60 days. 

Taxes written on hanging tags

However, as elaborated in the case of Estate of Cristofani v Commissioner, 97 TC 74 – Tax Court 1991, where the time frame goes beyond the prescribed time, the gift funds that are held in trust automatically fall under the armpit of stipulated rules of withdrawals as indicated by the trust’s grantor.

In essence, a crummy trust is an example of an irrevocable life insurance trust. The rationale for this is that a grantor uses it to fund the trust. The funding is done so that payments are regarded as gifts of present interest to the trust’s beneficiaries. The implication of this is that the gift qualifies for the annual gift exclusion. 

The payments are thus used as premiums for the life insurance policy. One of these types of trust characteristics is that the beneficiary doesn’t need to pay any income taxes due to the majority age limitation. Consequently, a crummy trust is an effective way of transferring large amounts of properties without being subjected to the requirement of paying taxes.

Notification of the Beneficiaries

Where a crummy trust exists, the beneficiaries are notified of the gift by way of a letter. This letter is generally referred to as a crummy withdrawal right or a crummy notice. After the notification process, a crummy withdrawal right can be accorded to the minor through a guardian. 

This allows for the creation of crummy trusts for even infants. It is, however, worth noting that the withdrawal notice should be given every year as per the IRS regulations. This is because ‘once only’ notice is rendered inadequate.  

Advantages and Recommendations

One of the advantages of using a crummy trust is that it allows for transferring property from the grantor to the beneficiary without paying taxes. The effect of this is that it can be used to pass large sums of properties at tax-free terms. 

The trust has been used since 1968 after the Crummy et al. v Commissioner of Internal Revenue case to minimize estate and generation-skipping transfer tax (GSTT). Therefore, this type of trust is effective for the passage of property as gifts from parents to their children through the fiduciary relationship established under a crummy trust.


A crummy trust is a type of trust created to benefit persons to whom gifts are bequeathed to them while excluding them from the unified gift and estate tax. Parents have used this property transfer system to pass property to their children without incurring the cost of taxation. 

Therefore, a crummy trust is a fiduciary relationship between the parent (grantor) and the children (beneficiaries). The trust is effective where the age of the beneficiaries is below 18 years. A crummy trust has been proved to be an efficient and cost-effective mechanism of passing the property.

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Estate CPA

Gilbert, AZ