What is a Crummey Trust?

When I suggest a Crummey Trust to clients, I often get a smile and a puzzled look. “Why would I want a crummy trust?” they ask. Despite the name, a Crummey Trust is a practical way to give to loved ones, qualify those gifts for the annual gift tax exclusion.

The overview below explains how these trusts work, when they are useful, and the common missteps to avoid.

The Annual Gift Tax Exclusion

In 2025, you can give up to $19,000 per recipient each year without gift tax. This is the annual gift tax exclusion, and it is adjusted from time to time.

There is no limit on the number of people you can benefit. For example, if you have five children and ten grandchildren, you can give each of them $19,000 in a year. Over time, this can meaningfully reduce the size of your taxable estate.

A married couple can “split” gifts so a single contribution can use both spouses’ exclusions. If you and your spouse agree to split gifts, your combined annual exclusion for one beneficiary would be $38,000 for 2025. Gift splitting requires a timely filed Form 709 for at least one spouse, often both, so keep your tax preparer in the loop.

What Are Crummey Powers?

For a gift to qualify for the annual gift tax exclusion, the beneficiary must have a present interest in the gift. This means the beneficiary has immediate access to and control over it.

Gifts placed in an irrevocable trust are usually treated as future interests, so they do not qualify unless the trust gives the beneficiary a temporary right to withdraw the contribution. A court decision, Crummey v. Commissioner, created a solution. If trust beneficiaries receive a temporary right to withdraw the contribution, the gift is treated as a present interest and can qualify for the exclusion.

This temporary right typically lasts 30 to 60 days after the contribution. If the beneficiary does not withdraw the funds during that window, the money stays in the trust and remains subject to the trust’s protections and distribution terms.

Many trusts use a technique known as a “hanging power.” If the beneficiary’s right to withdraw would lapse by more than the safe amount permitted each year, the excess withdrawal right does not vanish, it hangs and can be exercised in later years as new contributions are made. This helps avoid estate inclusion issues that can arise when withdrawal rights lapse by more than the greater of 5 percent of the trust value or $5,000, sometimes called the 5 and 5 rule.

Why Consider a Crummey Trust?

A Crummey Trust can be helpful if you want to:

• Make annual exclusion gifts in a tax-efficient way while keeping assets protected for beneficiaries.
• Provide for minors without handing them large sums too early.
• Guard against creditors or impulsive spending.
• Gradually transfer wealth out of your estate to reduce potential estate tax.

Outright gifts also qualify for the exclusion, but they lack the structure and protection a trust provides.

These trusts are also used with life insurance. An Irrevocable Life Insurance Trust, often called an ILIT, receives annual gifts that qualify for the exclusion through Crummey powers. The trustee then uses those funds to pay premiums on a policy owned by the trust. At death, the insurance proceeds can pass outside the insured’s taxable estate, then be held and distributed under the trust’s terms for the family’s benefit.

How Crummey Trusts Protect Beneficiaries

A well-drafted trust can include spendthrift provisions that:

• Prevent a beneficiary from selling or assigning their trust interest.
• Shield trust assets from most creditor claims while those assets remain in the trust.
• Allow a trustee to manage and distribute funds according to your instructions.

You choose the trustee and set the terms for distributions. It is possible for a beneficiary to serve as trustee when they are financially mature, as long as their discretion is limited to distributions for health, education, maintenance, and support.

Can I Contribute More Than the Annual Exclusion?

Yes. You may not need to pay gift tax even if you make a gift larger than the annual exclusion. In addition to the annual exclusion, each person has a lifetime federal estate and gift tax exemption of $13,990,000 in 2025. If you make a gift that exceeds the annual exclusion, the excess simply uses part of your lifetime exemption. You will need to report that gift on your tax return.

Avoiding Pitfalls: Making a Crummey Trust Work

Because the IRS looks closely at these arrangements, it is important to follow the formalities:

1. Send written notices. Each time a contribution is made, the trustee must notify the beneficiaries in writing. If the beneficiary is a minor, the notice can be sent to a parent or guardian.
2. Keep good records. Beneficiaries should acknowledge receipt, and the trustee should keep copies with the trust records.
3. Allow a reasonable withdrawal period. Beneficiaries should have at least 30 days to withdraw the gifted amount.
4. Avoid understandings not to withdraw. The grantor or trustee may explain the benefits of leaving assets in trust, such as asset protection, but there should not be a direct or indirect agreement discouraging withdrawal.

If these guidelines are not followed, the IRS may disallow the annual gift tax exclusion, which can lead to unintended tax consequences.

Can Crummey Trusts Fail?

They can, if the formalities are ignored. Late or missing notices, an unreasonably short withdrawal period, or side agreements not to withdraw are common issues that can undermine the exclusion. Careful administration prevents most problems.

Talk With an Attorney

Crummey Trusts are powerful tools, but they need thoughtful drafting and consistent administration. If you are considering this strategy, speak with an experienced estate planning attorney about your goals and family circumstances to determine what structure is best for you.

This article was originally published on January 1, 2024 and updated on November 5, 2025.