Many parents and grandparents want to pass their wealth to their children while they are still alive. Gifts to children or grandchildren can be a good way to reduce a taxable estate. While you can give a child or grandchild $15,000 (in 2020) a year without incurring taxes on the gift, you probably don't want a young child receiving the money outright. A "Crummey" trust provides a way to take advantage of the gift tax exclusion while keeping the money in a trust until the child is old enough to handle it.
You may have heard of "custodial accounts" for children, where the parent or someone else retains custody of the child's account. The downside of these accounts is that the child has the right to the money when he or she reaches the age of majority (18 or 21, depending on the state). You may not want an 18-year-old getting a large sum of money.
The benefit of putting money for a child into a trust rather than a custodial account is that you can decide when the money will be given to the child and how much the child will receive. But putting money into a regular trust presents one big problem: In order for the gift to avoid being taxed, the child must have a "present interest" in the money. Because a promise to give someone money later does not count as a present interest, most gifts to trusts aren't excluded from the gift tax.
The Crummey trust (named for the court case that approved this type of trust) is designed to allow you to put money into a trust and receive a gift tax exclusion. The trust includes a provision that gives the beneficiary a temporary right to withdraw money from the trust. After a certain amount of time has passed (usually 30 days), the beneficiary can no longer withdraw the money and it becomes a part of the trust. It is very important that you notify the beneficiary of the gift and his or her right to withdraw the gift or the IRS will not apply the gift tax exclusion. There is the risk that the beneficiary will withdraw the money right away, but you can make it clear (but not in writing) that any withdrawals will mean that he or she will not get any more gifts from you. Once the money is in the trust, you control how much the beneficiary can receive and when.
Before setting up a trust, be sure to talk to your attorney about what is right in your situation. To find an attorney near you, go here: https://www.elderlawanswers.com/elder-law-attorneys.
For more information on trusts, click here.
For more information on giving to grandchildren, click here.