What Happens If You Forget to Do Crummey Letters?

A Crummey Trust isn't "crummy," it's a type of Trust named after Clifford Crummey and the court case Crummey v. Commissioner. In this case, Mr. Crummey successfully defended against the IRS and created a new eponymously named tool for individuals who wish to gift into an irrevocable Trust.

Prior to the Crummey case, the annual exclusion (current $19,000) could not be used to exclude a gift made to an irrevocable Trust from gift taxes. This meant that each gift to an irrevocable Trust would count against your lifetime Federal estate tax exemption. Mr. Crummey's attorneys set up an irrevocable Trust where each year, after a gift was made to the irrevocable Trust, a letter (Crummey letter) was sent to the beneficiaries, and the beneficiaries were given a one month window to withdraw the gifted funds. Using this technique, an amount up to the annual exclusion amount per year per beneficiary can be gifted to an irrevocable Trust without any Federal estate tax impact.

One of the most common types of Crummey Trusts is a Life Insurance Trust. If you have a Life Insurance Trust, or any irrevocable Trust that you make gifts to, you likely need to send Crummey letters to beneficiaries. If you do not send out Crummey letters, you cannot use your annual gift tax exclusion and you will need to file a gift tax return reporting use of your Federal Estate tax exemption. If you have a taxable estate, each missed letter can result in up to a $5,600 increase in estate taxes.

If you have additional questions about the Crummey letter process or questions about how to administer the Crummey letter process, please call Rehberg Law Group at (206) 246-8772.