New Mexico Crummey Trust Lawyer

Families looking to gift money from their estate to a child — or any other beneficiary — may want to look into a Crummey trust. These unique trusts provide a way to avoid deducting from your lifetime gift tax exemption.

They are highly structured, with specific rules that enable the use of your annual gift tax exclusion for contributions to apply for future years by giving beneficiaries a “present interest” in those contributions.

Because a Crummey trust relies on a technicality under IRS rules, it is vital for the creator of the trust to understand how to most effectively create and structure the trust in order for the intended benefits to be gained.

New Mexico Financial & Family Law can help you with your plans for giving to future generations or another beneficiary you care deeply about with the use of instruments like the Crummey Trust. You can receive tailored advice based on your portfolio and your long-term goals for your estate during a no-risk, no-obligation consultation with a New Mexico estate planning attorney.

During your appointment, you’ll review your options and have the opportunity to ask questions, guiding you toward the optimal solution that can help you achieve all of your goals — for this life and the next.

Find out more about how a Crummey trust works and what alternatives you may want to pursue when you call 505-503-1637 or contact us online to schedule your risk-free, confidential consultation today.

When Would I Want to Talk to a New Mexico Crummey Trust Attorney?

As described above, a Crummey Trust is a very specific type of trust intended for a very specific purpose: maximizing annual gifting without affecting your lifetime gift tax exemption, usually with the intention of delaying the final disbursement of the gift to the intended beneficiary.

Here’s how a typical Crummey trust arrangement works:

• The trust creator, or grantor, creates an irrevocable trust, which is a separate legal entity. This separate status means that any assets placed into the trust are removed from the grantor’s estate.
• The grantor chooses beneficiaries who will receive distributions from the trust according to the provisions set in the trust at the time of its creation. Importantly, these designated beneficiaries cannot be changed after the trust is created.
• The grantor can fund the trust at any time, transferring assets or liquid cash into the ownership of the trust.
• In a Crummey trust, the grantor will typically make annual transfers into the trust that equal their annual gift tax exemption. In 2024, the annual exempt amount is a maximum of $18,000 for individuals and $36,000 for married couples.
• What makes the Crummey Trust unique is that one or more beneficiaries will be notified about their ability to withdraw recently added funds from the trust at their own discretion within a very limited window, usually 30 to 60 days. This notice is often referred to as a Crummey letter.
• If the beneficiary receiving notice of the option to withdraw elects not to withdraw, the amount made available stays in the trust but also qualifies as an annual exempted amount, avoiding reduction of the grantor’s lifetime gift tax exclusion.
• All beneficiaries (potentially including the grantor themself) are able to draw income from the proceeds of the trust but know that this income can affect the exempt amount and trigger income or capital gains taxes.

This rather odd arrangement accomplishes one major thing: it gives the beneficiary a “present interest” in the funds, as they have the option to withdraw the funds, albeit within a limited window. The creation of a present interest allows the Crummey Trust to take advantage of the IRS’s strict rules about lifetime vs annual gift tax amounts.

Without a present interest, all funds would contribute to the lifetime exemption of the grantor since they are intended to be accessed at a later date rather than at the time of the initial gift offer.

Situations Where a Crummey Trust Would Be Beneficial

Typically, the beneficiary will want to choose not to withdraw the funds after they have given notice of permission to do so. Delaying the withdrawal can create advantages for the grantor, the beneficiary, and the trust itself.

Examples of a situation where a Crummey trust would provide advantages to the parties involved include:

• Giving to a minor dependent child or other non-adult beneficiary with the intention of delaying their access to the funds until the time that they are able to responsibly use them
• Setting aside funds for a specific purpose or milestone, such as paying for college or requiring the beneficiary to complete a bachelor’s degree before they can access the funds held in trust
• Leaving funds and other assets to appreciate in trust, where they can grow and provide income using the principal amount (which still remains eligible for the gift tax exclusion in the year they were contributed)
• Preserving tax-exempt amounts using the laws of the year when the funds were contributed in case tax laws change to reduce the exemption amount or otherwise become more unfavorable to the grantor’s financial situation

Benefits of Working With an Experienced New Mexico Crummey Trust Lawyer When Setting up Your Trust

There are two main reasons that a seasoned New Mexico estate planning attorney can provide valuable services during the creation of a Crummey trust:

1. To ensure that the language and structure of the trust are capable of providing the intended benefits while complying with all other applicable IRS and state or federal rules
2. To ensure that the intended use of the Crummey Trust is executed properly, beneficiaries should be given clear, written notice of their power to withdraw funds.

New Mexico Financial & Family Law can carefully review your situation to determine if a Crummey trust provides the most advantages for your intended goals. Know that you have a multitude of options when creating a trust intended to provide for your beneficiaries in the future.

A Crummey trust can be a great choice, but it is vital to understand the advantages and limitations of each option before arriving at a final conclusion.

Working with an attorney provides you with peace of mind, knowing that you chose the best option that’s capable of preparing your portfolio for possible risks or unforeseen consequences. You can also know, with confidence, that your trust is structured in a sound way and that it will be able to perform all of the actions needed in order for you to reap the tax advantages you’re seeking.

An Example Crummey Trust

Mr. Albert Example wants to set aside funds for his child, Betty, who is now only eight years old.

If he gives funds to the child now, that could create challenges for the child in managing the funds. However, if Albert deposits the funds entirely into a trust, then those funds will all count as a gift to Betty, the beneficiary when she receives them.

Moreover, if Betty receives more than the current year’s gift tax exemption amount, Albert will be expected to pay a gift tax on the remaining balance that exceeds their lifetime exemption.

Importantly, though, the IRS permits funds to remain qualified as an annual gift amount, as opposed to a lifetime gift amount, if the recipient has a present interest in those funds. What that means is that because Betty can choose to use the funds now, even if she does not make that choice, that gift is technically made in the year when the funds were contributed.

If Betty decides not to access the funds, they can remain in the trust until the time comes that a provision in the trust is activated, distributing the funds to Betty at a later date.

To remain compliant with IRS rules, Albert can deposit up to a maximum of $18,000 (or $36,000 for a married couple) each year that’s intended to go to Betty. Albert must then be absolutely sure to notify Betty that she has permission at her own discretion to access the funds, within a limited window, each time they are deposited.

Betty can take the funds then, but she likely knows that by waiting longer, the trust can allow assets to appreciate, and she will likely have a bigger distribution, accordingly.

One can see how this situation can create advantages for both a minor beneficiary and the grantor parent. With this arrangement, Albert can deposit ten times the annual exemption amount for a total of at least $360,000 (in a situation where the annual exemption does not increase year-over-year), which is likely to be completely exempt from gift taxes.

Not only that, but Albert gets to delay the time when Betty has access to the funds, enabling him to protect Betty from the pressure of money in her childhood while also allowing assets to grow and appreciate within the trust.

If Albert or others draw income from the trust, Betty can still get this full $360,000. If the income does not reduce the principal, others can earn a steady amount from the proceeds of that principal.

Avoiding IRS Scrutiny When Creating a Crummey Trust

The Crummey Trust has an unusual name, owing to the first person creative enough to use its structure as a strategy to maximize its annual gift tax exemption. After D.C. Crummey created the trust, the IRS disputed that the deposits in the trust constituted a “future interest” because they alleged that Crummey clearly meant to have the funds made available at a later date.

However, in the Ninth Circuit of Appeals case Crummey v. C.I.R. (1968), the court formed the opinion that Crummey’s efforts to give his children the option to access the funds meant that they did have a meaningful “present interest” in the contributions.

Since the ruling, the IRS has not rested quietly on the matter. Instead, they have issued guidance and letter rulings describing when they might move to dispute the use of a Crummey trust to utilize annual gift tax exemption amounts.

One such letter issued to a filer (Letter Ruling 199912016) clearly spelled out the four factors the IRS looks for when deciding if a Crummey trust provides a valid “present interest”:

1. The trust provided reasonable notice about the beneficiary’s right to withdraw from the trust
2. The beneficiary was given a reasonable amount of time in which to exercise their right to a withdrawal
3. The withdrawal right gives unrestricted and immediate access to the amount transferred into the trust in full
4. There was not any direct or implied agreement between the grantor and the beneficiary that they would not exercise the right to a withdrawal.

As you can see, a Crummey trust can be used to thread the needle through a tax loophole, but that same thread is also a tightrope of legal obligations that the grantor has to walk in order to remain compliant with the IRS’s present interest requirements for an annual gift tax exclusion.

Not only should the grantor be careful to contribute only certain amounts and make them accessible to beneficiaries with notice, but they must also make plans to maintain the trust as its assets appreciate, especially if they intend to furnish an income to themself or others from the proceeds of trust assets.

Get in Touch With an Experienced New Mexico Crummey Trust Law Firm

New Mexico Financial & Family Law strives to help you fully understand all your options for estate planning, including all the different ways trust formations can help you succeed in your specific goals for giving while minimizing tax obligations.

We are here for you whenever you want to make solid plans for the future of yourself, your family, and your legacy. After taking the time to strategize and execute your estate plans, you can rest easy, knowing that the people you care about most are protected and financially provided for years to come.

If you are interested in learning more about a Crummey trust, as well as your other options for reducing taxes or accomplishing other unique goals for trust formation, reach out to our experienced attorney team. Schedule your confidential consultation with no obligation today when you call us at 505-503-1637 or contact us online.