There has been heightened talk with clients and prospective clients about gifting and the use of irrevocable trusts to address potential estate tax law changes. Along with these discussions I have received a few questions about Crummey notices and what these notices are used for.

A Crummey notice is used when a gift is made to an irrevocable trust. This notice is sent by the trustees of the irrevocable trust to the trust’s beneficiaries to let them know that a gift has been made to the trust. This notice will tell the beneficiary the amount of the gift; that they have a right to withdraw the gift from the trust for a certain amount of time; and that the gift will remain in the trust if they do not withdraw it.

Why would the trustee send these notices to the beneficiaries? The reason to send this notice is so the grantor, who is the person making the gift, is able to apply their annual gift exclusion to this gift for each beneficiary of the trust. Currently, the annual gift exclusion is $18,000. This exclusion allows a person to gift another person up to $18,000, without the gift reducing their lifetime federal estate and gift tax exemption amount.

When gifting to a trust, the beneficiary must have a present right to receive the gift and knowledge of this right for the grantor to apply the annual gift exclusion. The Crummey notice gives the beneficiary the necessary notice of the gift and their right to withdraw the gift.

The goal and expectation for most irrevocable trusts is that the beneficiary keeps the gift in the trust after receiving the Crummey notice. Generally, to remove the gift would go against the plan for the trust arrangement. For example, when a grantor gifts money to an Irrevocable Life Insurance Trust, it is generally understood that the money gifted is intended to pay the premium payments on the life insurance policy owned by the trust.

If the beneficiary takes the gifted money from the trust after receiving the Crummey notice, the trust may not be able to make the life insurance premium payment and there is a risk the value of the life insurance policy will be reduced, or the policy will lapse. It is not in the beneficiary’s best interest to withdraw these gifted funds, because they risk reducing the value of the life insurance policy proceeds that they will receive when the trust is terminated.

Balzarini is an attorney at law with Hellmuth & Johnson PLLC. Contact him at [email protected].