It's 1968. The times, they were a-changin'. Societal norms and views were shifting, and the youth were taking to the streets to protest and challenge authority. Meanwhile, California businessman, Clifford D. Crummey was funding his family's life insurance trust using annual Christmas gifts. But when the IRS stepped in to claim those gifts didn't qualify for tax exlusion, Crummey made his own challenge to authority.
In this episode of BIF Bites, we're talking about "Crummey Powers," and how this often-overlooked estate planning tool can help families move millions of tax-free dollars through dynasty trusts.
What are Crummey Powers?
Crummey powers are a provision in irrevocable trusts that give beneficiaries or someone acting on their behalf a temporary right to withdraw newly gifted assets within a limited period (usually 30 days). This converts a future interest gift into a present interest, satisfying the IRS' requirements for the annual gift tax exclusion. Crummey powers let donors to the trust benefit from tax-free gifting up to the statutory annual limit per recipient they normally couldn't do with a standard trust. If the recipient does not exercise their right to withdraw, assets remain in the trust for their intended purpose.
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Click Below to Read Full Transcript
00:00:08
Hello, BIFF friends, and welcome to a most excellent episode of the BIF Bites Podcast. I am your loyal host on a solo flight today, Adam Scherer, and I'm delighted to be bringing you a short but very meaningful story about a certain someone by the name of Clifford D. Crummy and how he revolutionized estate planning back in the 1960s. All right. So let's get things started with laying the groundwork. So it's Christmas time, where in the 1960s, an old Clifford Crummy is getting prepared to make his annual gifts to his children.
00:01:01
And what Clifford did was he was like, I don't like those wooden toys. I don't like the board games. What I'm going to bestow upon my kids via an irrevocable trust is a deposit of money into that trust for those individuals. So generous old Clifford puts separate amounts for each individual up to what would be the annual exclusion limit at that time, way back in the 1960s. It was a fraction of what it is today. And what he argued was that because each of the children had a demand provision, meaning that they could demand up to the amount deposited in a given year, as long as they wrote it up and submitted that by December 31st of that year, all right? And if they didn't do that, then their right to demand the money lapsed and the funds remained in the trust. And because the children could demand the money, Clifford believed that that was a present interest gift.
00:02:27
Now, as you listeners may know, that in order for any individual to use the annual exclusion amount to gift to others or to entities such as an irrevocable trust, the transfer needs to be for a present interest, meaning that the individuals in receipt of those funds can use and enjoy those funds today.
00:02:56
Clifford believed that was the case because of this demand provision, but the IRS didn't see it the same way. They said, uh-uh. It's not the demand that makes the present interest gift. It's the actual withdrawal. And because those funds remained within the trust, we do not see the same way here, Clifford. Those are future interest gifts in our eyes, and you cannot use your annual exclusion amount.
Well, courageous Clifford found it within himself around Christmas time to take the IRS to court. And there is a historic case in the '60s, Crummy versus the IRS commissioner. And what happened there was the case was presented. Clifford says these transfers, because
00:03:52
There was a limited window in which the beneficiaries could withdraw our present interest gifts. That is a present interest. Therefore, annual exclusion applies. IRS says, no, no, no, no, no. No withdrawal took place. It's a future interest. The Ninth Circuit held that the withdrawal right did create a present interest, even for the minor beneficiaries that were tied into that irrevocable trust.
00:04:21
so long as that right could be legally exercised, okay? And as a result of that, we have today what are known as Crummy powers, because essentially what Clifford D. Crummy did around Christmas time in the '60s was he stood up to the IRS and converted what would be future interest gifts into present interest gifts, and in doing so, created a valuable avenue for taxpayers looking to leverage their annual exclusion amount when gifting funds into trusts.
00:05:03
So today we have the crummy powers and they allow for tax efficiency. They allow for some flexibility, right? It does give the right to beneficiaries to actually withdraw money. But in order to do so, we do need documentation. And what happens in taking that future interest gift, creating present interest gift, allowing annual exclusion to be utilized, a crummy letter needs to be drafted and delivered to the beneficiaries on an annual basis. What this does is it opens up a window of time, usually 30 to 60 days, within which those beneficiaries have the ability to withdraw a certain amount of funds from the trust. And that sets into stone the present interest gift for that year.
00:06:01
And they can take the money out, but often that's not the case. This is more of just like record keeping. And families will often have discussions with beneficiaries about why this is happening, what the purpose of the trust is. Obviously, they have the ability to do so if they feel that's appropriate and that they'd like to. But simply, crummy powers allow future interests to become present interests, which allow the annual exclusion amount to be used.
Now, in absence of that annual exclusion amount, what would happen is that transfers into that trust would be, quote, unquote, taxable, meaning that we've lost that line of defense of the annual exclusion amount, and now we're starting to deplete slowly over time the lifetime gift tax exemption. So this allows just for safeguarding protection of that exemption amount.
00:06:59
Where do we see this today in modern applications? Well, any sort of multi-generational wealth transfer vehicles, dynasty trusts, they're especially powerful in islets for payment of the insurance premiums that are within the irrevocable life insurance trust, and also some generation skipping trust situations as well. And that's it in a nutshell, folks. So this delightful Christmas time story from way back in the 1960s, in which our courageous hero, Clifford D. Crummy, stood up to the commissioner of the IRS and put into motion something that has had great impact in estate planning strategizing. And it's that crummy letter and crummy powers, allowing a future interest to become present interest
00:07:57
And as a result, allowing taxpayers to use their annual exclusion amount to avoid unnecessary gift tax. There you have it, folks. One of my favorite topics to teach in estate planning. I love how we have a hero's journey, someone that knew in the design of that trust that they had a case to be made that stood up to the powers that be emerged victorious, and their efforts and influence continue to be powerful even in modern day estate planning and gifting strategies. We are slowly headed toward the beginning of another CFP cycle. We're in that season already. It's wild how quickly these turn around.
00:08:46
And are so very appreciative of your listenership. For those of you who are checking into the BIF Bites podcast for the first time, know that there are so many valuable episodes that we've recorded in the past that are worth taking a listen to. Some of the favorites from CFP candidates that have preceded you in going through our catalog are our question paloozas, which are generally dropped closer to the exam window.
00:09:15
Our snake draft episodes are a whole lot of fun. The questions and misconceptions series is a whole lot of fun as well. Very informative. And take a listen, let us know what you think. And if anything comes to mind that you'd like to hear us talk through, we're very accessible. Reach out, we'd love to hear from you. But until then, it's your loyal host, Adam Scherer, signing off. Take care, be well, and we'll see you soon.
