How to Give Your Kids Money Now That They Can’t Use Until Later

gift2Recently, a client of mine asked me how to set up a trust to hold gifts to their children that those children wouldn’t be able to use for about twenty more years. This can be done by use of what’s called a “Crummey” Trust (named after the attorney who invented the technique).

This kind of trust is usually funded with annual gifts. Currently, you are allowed to give $14,000 per year to any one person without having to report the gift on a gift tax return or use any of your lifetime exclusion from the gift and estate tax (currently $5.43 million per person). A Crummey Trust allows you to make such annual gifts, but keep those gifts in trust for years. The gift counts as being made in the year of the gift, even though the beneficiary has no control over the money until the trust ends. Other people, like grandparents, can also make contributions to this kind of trust.

Why would you want to do this? The first reason is control: if your children are currently minors (let’s say, middle schoolers), you probably don’t want to just put $14,000 into their bank accounts each year, unless you are extremely relaxed about the choices they’d likely make with that kind of annual bonanza (or want to support GameStop). You’d much rather put that money into a trust that’s managed for your children until they grow up to an age where they’re likely to use the money more wisely. Since you are setting up the trust, you can have control over what the trust’s assets can be used for, too — maybe it’s just for the purchase of a house, or maybe just to pay for graduate school, or a wedding.

The second reason is appreciation: if you could give your children $14,000 worth of stock each year, and that stock is appreciating rapidly, all of that appreciation will be in their estates, not yours, which can make a lot of tax sense if you are fortunate enough to own rapidly appreciating assets. Imagine, for example, that you owned Apple stock in 1980 when it traded for about 27$/share and had given $14,000 worth of that stock (about 518 shares) to a Crummey Trust for the benefit of your children–today that stock would be worth about $63,000! (Of course, the annual exclusion was lower then, I’m just giving you an example to ponder.)

You could instead open up a custodial account at the bank and put annual contributions there, but a custodial account created during your lifetime terminates when a child turns 21 at the latest, so that’s not the best choice for families that would like to keep money in trust longer.

So, here’s how it works. In order to get your gift to count as an annual gift, you have to set up a Crummey Trust and jump through a few, requisite hoops. First, the trust is irrevocable, which means that you can’t change the terms once you set it up.  Second, your Trustee (who isn’t you) has to send an annual notice to the trust beneficiary, telling them that a gift has been made to the trust, and giving them a meaningful amount of time to withdraw the money (say, 30 days). If they don’t withdraw the money, it’s considered an annual gift, and subject to the terms of the trust thereafter. While your children are minors, you, as the parent, sign the withdrawal notice. After they turn 18, they sign the notice. The IRS just cares that they are notified and that they have a meaningful opportunity to really withdraw the money.

If you’d like to find out more about Crummey Trusts and how you can use them to maximize tax efficient gifts to kids, please get in touch.