Crummey Withdrawal Powers and the Annual Exclusion
Course: Estate Planning
Lesson 5: Transfer Taxation II — Lifetime Transfers
Student Question:
Hi,
I understand that a gift of a future interest normally does not qualify for the annual gift tax exclusion, but then the lesson says a Crummey withdrawal power turns it into a present interest gift. I’m confused because the whole point of a Crummey trust is that the beneficiary is NOT supposed to actually withdraw the money — they’re supposed to let it lapse so it stays in the trust. If they aren’t really getting immediate use of the funds, how does that qualify as a present interest?
Thanks for your help.
Instructor Response:
Hi,
Good question. It’s because the annual exclusion tests the beneficiary’s right to withdraw, not whether they actually use it. The moment the trustee gives notice of a contribution, the beneficiary has an unrestricted right to demand that money right then — and that right alone is what makes it a present interest gift.
What happens after that is a separate matter.
This is exactly why Crummey powers show up so often in Irrevocable Life Insurance Trusts — it lets ongoing contributions qualify for the annual exclusion while the funds remain in the trust to pay premiums.
Does that help clarify?
