A trust is a legal instrument used to avoid probate, while also providing a benefit for a specific beneficiary or group of beneficiaries. While the specific requirements for forming a trust vary by state, some general requirements include:
- Settlor Capacity: The settlor must have proper mental capacity in order to create the trust, meaning that they must intend to create a trust expressed with any necessary formalities of the state. An example of this would be the trust being in writing;
- Identifiable Property: Trust property, or trust res, must be specifically identifiable. This means that there must be a sufficient enough description to know what property is to be held;
- Identifiable Beneficiary: The beneficiary or group of beneficiaries must be sufficiently identifiable, meaning that they must be able to be determined at the time the trust is formed. However, in the case of a charitable trust, this is not a requirement; and
- Proper Trust Purpose: The trust cannot be created for an illegal reason. An example of this would be how a person cannot create a spendthrift trust and hold the property in their own name for their benefit simply to avoid creditors from reaching their assets.
Generally speaking, all trusts in the United States are presumed to be irrevocable unless the trust instrument otherwise states that the trust is revocable.
Are There Different Types Of Trusts?
The general purpose for creating a trust is to hold some sort of property in the trust for the benefit of another person or party.
The following is a list of the most common trusts that may be created:
- Inter Vivos or Living Trust: A trust that is created while the settlor is still alive. An inter vivos trust is generally designed to be revocable so that the settlor can add or remove property as they wish during their lifetime;
- Testamentary Trust: A trust that is created through a will, and generally becomes effective upon the death of the settlor;
- Charitable Trust: Charitable trusts transfer and designate a person’s assets to a charitable organization, for the benefit of a particular charity or organization. The requirements for creating a charitable trust are generally more relaxed than the requirements for other trusts, as they are viewed as a benefit to the public;
- Discretionary Trust: A trust that allows the trustee to decide when and how the trust assets and property should be distributed to the named beneficiaries;
- Special Needs Trust: A trust that is created to provide for additional income for a person with disabilities, while still allowing the person to receive government benefits. Special needs trusts work around the issue of a gift or inheritance being included in the calculation of the person’s income for benefits;
- Spendthrift Trust: A trust that is created to provide for the needs of another person, while also preventing the beneficiary from accessing the trust property. Spendthrift trusts protect the beneficiary from themselves by shielding them from their debts or creditors; or
- Land Trust: Trusts that allow a trustee to hold title to a specific piece of land or property, giving the trustee the power to manage the property, and make income distributions from the property.
What Is A Crummey Trust?
To reiterate, trusts are set up prior to a person’s death to avoid probate costs, and to reduce estate taxes. Because grantors have already “given” assets to beneficiaries through the trust, there is no need for the state court process of probate. An irrevocable trust avoids estate tax because the beneficiaries are the true owners of the money, and as such, pay taxes on the trust’s interest.
A person who establishes a trust for the purpose of giving away money can place a maximum amount of $12,000 into the trust every year, in order to avoid any “gift taxes.” However, in order for the money to be considered a “true gift”, it must fall under the full control of the beneficiaries.
Alternatively, most people do not want to give away their money and control over that money to their young grandchildren, or to others who may spend the money in a way that the settlor does not approve of. A Crummey trust allows the grantor to retain control of the gift, which means that they can designate how and when the money should be used. It is important to note that a Crummey trust can be created for beneficiaries of any age, not simply minors.
A Crummey trust allows the beneficiaries to gain complete control over the gift for a brief period of time, generally immediately following a deposit. As long as they are older than 18 years of age, the beneficiaries can withdraw the money during this time and use it how they wish. However, they will only have access to the most recent deposit, meaning the rest of the funds will remain secured in the trust if they have not yet been used.
How Does A Crummey Trust Work?
Crummey trusts are most commonly used by parents in order to gift money to their children while also placing restrictions on the trust to control how the money is used or spent. An example of this would be not allowing them access until they reach a certain age or milestone, such as graduating from college.
In terms of convincing beneficiaries to avoid spending the trust money is to simply warn them that no other money will be provided if they decide to immediately access it and spend it all. As long as this statement does not amount to some form of undue influence or economic coercion, it will not render the gift invalid. Rather, such a statement should enable the Crummey trust to do its job of avoiding estate taxes through the $12,000 gift tax exclusion.
If the beneficiary declines to use an annual gift, they must state as much in a writing. Once the beneficiary has waived their use of the gift, control will revert to the trustee, who will determine what to do with the unused amount. Although the trustee generally puts the gift back in the trust, it is not uncommon for a trustee to instead distribute the unused gift to other beneficiaries.
What Are The Advantages And Disadvantages Of Crummey Trusts?
There are many other advantages to using a Crummey trust. An example of this would be how unlike many other types of trusts, the Crummey trust does not give its beneficiaries total access to the trust once they reach the age of majority. This can be anywhere between 18 to 21 years of age, depending on varying state laws.
To reiterate, the beneficiaries will only have access to the annual amount that the grantor allocates to them, meaning that the rest of the trust will be locked away for future use. Additionally, a Crummey trust can be established for multiple beneficiaries, which can be especially useful for families that have more than one child.
There are some disadvantages to using a Crummey trust. An example of this would be how Crummey trusts come with high administrative costs. And, it can be expensive to have the Crummey trust created, as drafting the legal document in order to create this trust can be considerably difficult.
The trust must be written properly in order to ensure that the IRS does not view the Crummey Trust as a different kind of trust; otherwise, a person might lose the benefits of the trust. If the person who creates the trust also acts as its trustee, the trust will be counted as part of their estate taxes.
Do I Need An Attorney To Establish A Crummey Trust?
If you wish to establish a Crummey trust, you should consult with a local trust lawyer. An experienced and local attorney can help you establish a legally valid Crummey trust according to your state’s specific laws. An attorney will also be able to represent you in court, as needed, should any legal issues arise.
