There are many non-tax benefits to making lifetime gifts to family membrs.
If you are like most people, you may be reluctant to part with control over how your lifetime gifts will be used once transferred. Unfortunately, when you retain direct control over a gift, the value of the gift (and its appreciation) may be included in your estate for estate tax purposes upon your death. Worse yet, the gift may be taxable at the time of transfer as a future interest gift, rather than treated as a nontaxable present-interest gift.
To qualify as a nontaxable present-interest gift, the donee must be able to exercise complete and unrestricted control over the gift. Fortunately, there are exceptions to this general rule, such as custodial accounts for minors as I previously discussed. Another exception is the Crummey Trust, as created in the landmark case of Crummey v. Commissioner, 397 F2d 82 (9th Cir. 1968).
Although the Crummey case carved a very narrow exception to the general rule regarding the present-interest requirement for nontaxable gifts, the path is narrow that leads to safety. Therefore, it is essential for the success of your Crummey Trust that you follow all of the procedural requirements. Truly, the devil is in the details here.
Crummey Trust Requirements
First, you create an irrevocable trust agreement containing all of the strings you wish to attach to the future gifts to the trust. Second, you make lifetime gifts to the trustee on behalf of your trust beneficiary (or beneficiaries). Third, the trustee must provide written notice to the beneficiary (or their legal guardian, if the beneficiary is a minor) each time you make such a gift, giving the beneficiary a period of time (typically not less than 30 days) to exercise their right to withdraw all or part of the gifted amount.
If the beneficiary does not exercise this withdrawal right, then the gift lapses and the trustee administers the gift for the beneficiary according to the strings you attached. These strings may provide valuable protection for your gifts from divorces, lawsuits, bankruptcies and squandering. Conversely, if the beneficiary exercises this withdrawal right, then you may have gained a valuable insight into their current financial maturity level. In either case, you may wish to revise your estate plan accordingly.
These types of trusts usually involve Life Insurance and are commonly called an Irrevocable Life Insurance Trust or ILIT. I will discuss ILIT's more in detail in future posts.