As of 2013, the annual gift tax exclusion amount is $14,000. That means that you can give up to $14,000 per year to any one person without having to report that gift on a gift tax return by April of the year following the gift. But that gift has to be completed–if you write someone a check, they have to cash it. If they don’t have use of the money in 2013, that’s not going to qualify as an “annual gift.”
But what if you want to give an annual gift to your five year old? You don’t really want to give her the money now…..ideally, you’d like to make those annual gifts to her but keep the money in trust until she grows up, when she can spend it, you hope, responsibly. Can you do that? If you give her a gift in 2013, that she can’t spend until 2034, is that really an “annual” gift in 2013?
Yes! As a matter of fact, you can create a trust that can hold those annual gifts for years, provided that trust has what’s called “Crummey Powers” (named after the attorney who came up with the idea.) A Crummey Trust provides for something called a ‘withdrawal power.’ If your Trustee sends your daughter’s guardian (that’s you) a notice, letting you know that $14,000 has been deposited into her trust, and that she has thirty days to withdraw the money (or whatever your trust says, provided that it’s a reasonable amount of time to withdraw the money), but if she does not withdraw the money (which she won’t, of course) it will stay in trust until 2034, that WILL qualify as an “annual” gift.
Why? Well, the IRS has decided that if the trust’s beneficiary has a real opportunity to withdraw that gift in the year in which it was given, but chooses not to do so, the gift will qualify as an annual exclusion gift, despite the fact that in real terms, that beneficiary will not be able to use that money in that year.
Crummey Trusts make it possible for parents, grandparents, and others, to leverage the use of annual gifts over years to build up a trust for children that will be useful to them as those children mature. Crummey Trusts can be limited in scope or broad–they can be used as college education trusts, or limited to the purchase of a home. They can terminate when a child is eighteen or eighty.