Although a Last Will and Testament remains the most common way to distribute an estate, a significant number of people choose to use a trust in lieu of, or in addition to, a Will to distribute their estate. If you are named as a beneficiary of a trust, it usually means you are entitled to distributions from the trust according to the terms created by the Settlor. What does it mean though if you receive a “Crummy notice?” Let’s find out more about a Crummy notice and what to do if you receive one.
How Does a Trust Work?
Understanding a Crummey Notice can only be accomplished if you first understand some trust basics some trusts basics. Trusts are broadly divided into testamentary and living trusts. Living trusts are then further divided into revocable and irrevocable living trusts. The person who creates a trust is referred to as the “Settlor” (or Grantor, Maker, or Trustor). The Settlor appoints a Trustee whose overall job is to administer the trust using the terms created by the Settlor as well as manage and invest the trust assets. A trust must be funded using assets chosen by the Settlor. Sometimes, however, assets may need to be added to the trust after the trust’s original creation. When that happens, a Crummey Notice must be sent out to beneficiaries.
What Is a Crummey Notice?
The term “Crummey Notice” is so named because of the court case that created the legal notice requirement. At its most basic, a Crummey Notice is just a letter letting a beneficiary know that assets have been added to a trust and informing the beneficiary of his/her right to withdraw those assets if applicable. The law requires such a notice to be sent to ensure that beneficiaries of a trust understand their rights. It shul also notify a beneficiary of the time frame within which a withdrawal must be made.
Do I Need to Do Anything If I Received a Crummey Notice?
What you do after you receive a Crummey Notice depends on several factors. The first of those is the type of trust created and the second is the purpose of the trust. Sometimes, it is counter-productive for a beneficiary to act on the notice because withdrawing the assets goes against the trust purpose. The most common example of this is when the trust is an irrevocable life insurance trust, or ILIT.
An ILIT works by creating an irrevocable trust and then transferring in, or purchasing, a life insurance policy wherein you are the insured. Upon your death, the proceeds of the life insurance policy are then paid out to the trust. The terms of the trust agreement then dictate how the proceeds are spent. Premiums for the life insurance policy during the time you are alive are paid by the trust. Understandably, it would be an additional benefit if the funds you gift to the trust for the payment of those premiums were also tax-free. Without the addition of a Crummey power, gifts to an ILIT would not be eligible for the yearly gift tax exclusion because the gift must be one of “present interest” to be eligible for the tax-free treatment. If the “gift” cannot be immediately accessed by the beneficiaries, the gift creates a future interest, not a present interest. As soon as you add a “Crummy power,” however, your gift becomes eligible for the yearly gift tax exclusion.
Although the “Crummey power” gives the trust beneficiaries the right to withdraw the funds gifted to the trust immediately after they are transferred in to the trust, doing so runs counter to the trust purpose. Those funds are intended to be used to pay the premiums on the life insurance policy – a policy that will ultimately pay out a considerable sum of money to the beneficiaries after your death. So in this case, the idea is for a beneficiary to effectively ignore the notice.
Please download our FREE estate planning checklist. If you have additional questions or concerns about the significance of a Crummy notice, or any other trust related questions, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.