Recently, 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.