3 Things You Didn't Know About Crummey Letters
By Caroline Lupini
Crummey Letters help us avoid extraneous taxation on sums gifted to beneficiaries of an irrevocable trust, but why do they exist in the first place? In this article, we’ll go over three things you didn’t know about Crummey Letters.
Crummey Letters are named after a California reverend
That’s right; the Crummey name comes from Reverend D. Clifford Crummey who, along with his children, argued that the sums gifted to his childrens’ trusts should not be subject to gift taxes. However, those who knew him best did not recognize him as the namesake of Crummey Letters, but rather for his philanthropy and accomplishments.
Crummey was heavily involved in his church communities not only as a minister, but as an administrator. He was active in setting up outreach programs for the poor and homeless in his community, and even helped support the establishment of the United Farm Workers Union. He was wealthy, but evidently self-aware enough to fight for fair representation not only in his communities, but in the management of his own assets.
Crummey v. Commissioner is not the first relevant case
It’s no surprise that disputes over tax exemptions have existed as long as tax law itself. Even so, it is worth noting that the case that resulted in the creation of Crummey Letters relied heavily on precedent cases.
The main ruling in Crummey v. Commissioner relied on an important and precedent distinction between the actual enjoyment of benefits, and the right to enjoy said benefits. In other words, beneficiaries of a trust are exempt from paying gift taxes on any gifted sums as long as they are aware that they have the right to withdraw those funds. This distinction had already been discussed in previous cases, notably Kieckhefer v. Commissioner and Gilmore v. Commissioner. These cases informed the decision of the tax court in Crummey v. Commissioner, which led to the concept of Crummey Power and the establishment of Crummey Letters.
Crummey Letters might seem like a technicality, but they’re necessary
Crummey Letters are the formality through which tax-free gifts are given and received. As long as a trustor or trustee alerts beneficiaries of their right to withdraw funds from their irrevocable trusts, the gifts are tax exempt. Note that funds must not exceed an IRS specified limit annually, per person.
This process seems like a technicality because in principle, it’s likely that beneficiaries are not expected to withdraw those funds before a given time. However, failure to send a Crummey Letter increases the possibility of further investigation by the IRS and potential extraneous taxation. If a trustor or trustee cannot demonstrate that their beneficiaries were aware of their right to withdraw funds, then the gift cannot be tax-exempt. To avoid that hassle, it’s best to remember to send an annual Crummey Letter and make sure that the letter is well documented.
Bottom Line
While D. Clifford Crummey simply wanted his children to enjoy the benefits of his gifts without the added burden of gift taxes, Crummey v. Commissioner set an important standard for irrevocable trusts that we still use today. If you are setting up a trust for your loved ones, don’t forget to send your annual Crummey Letter!