By: Caroline Lupini

In these times of great uncertainty, it is perhaps more important than ever to think about what (and whom) we are leaving behind at the end of our lives. When we begin to explore this unpleasant yet crucial subject for the first time, we may be left with more questions than answers. For example, how can I protect the assets I leave to my family and loved ones, including my life insurance proceeds? Is it possible to set up a trust and avoid extraneous taxes for myself and my beneficiaries?

The short answer is yes, and this is where Crummey Letters come in handy. To understand what they are and why they are necessary, we need to go back to 1968 and look at the case that defined them: Crummey v. Commissioner. In this case, Clifford Crummey established a trust and then used his annual exclusion to make gifts to his children. The IRS initially denied the eligibility of these gifts for the exclusion because they served “future interests” as opposed to “present interests”, a necessary criteria for the exclusion. 

Here, “future interest” is a term that implies that a minor child has no access to the gift funds before they reach a certain age or status. In that sense, they have no present use for the funds. However, in a dispute over what constitutes a “future interest” and what constitutes a “present interest,” the tax court in a precedent case made a notable distinction between the actual use of the funds, and the right to use the funds.

This is an important note and the basis of Crummey Letters; the right to enjoy the benefits, rather than the actual enjoyment of the benefits, is what qualifies the gift for tax exemption. So, how exactly do Crummey Letters help you prove the validity of your tax exemption when managing your trust?

Crummey Letters document for the IRS that the beneficiaries of an irrevocable trust have an unequivocal right to withdraw the gift funds to which they are entitled. The letter must state that beneficiaries are allowed to withdraw funds within a given time period, and the gifted amount must not exceed annual exclusion limit per beneficiary, currently $15,000 for 2021. Again, the right to enjoy the gift funds is the distinction here, and under Crummey v. Commissioner and precedent cases, a Crummey Letter serves as proof that the beneficiaries are entitled to enjoy their tax-exempt gift. 

Whether or not the beneficiaries actually withdraw funds is relatively immaterial. Of course, the hope and intention for the trust is that they do not withdraw funds until a specified time, but the right to do so is the important distinction. With a Crummey Letter, one can prove that the right to enjoy funds has been given by the trustor during every tax year. 

The bottom line: Crummey Letters allow trustors to gift funds without subjecting the funds to gift taxes, and allow beneficiaries to ultimately enjoy the funds without them being subject to estate tax. To take advantage of these benefits, make sure to send a Crummey Letter to each of your beneficiaries every year, and take care to retain documentation that you have done so. In this way, your beneficiaries will be able to enjoy the full amount of your gift without any extraneous taxes.