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Simple English definitions for legal terms
Crummey power
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A quick definition of Crummey power:
A Crummey power is a right given to someone who benefits from a trust to take out a certain amount of money from the trust as a gift. This power usually lasts for 30 days after the gift is given and can be up to $5,000 or 5% of the trust's value. The person can choose not to use this power if they want. This is done to avoid taxes and make it easier to give small gifts.A more thorough explanation:
Crummey power refers to the right of a beneficiary of a Crummey trust to withdraw gifts made to the trust up to a maximum amount for a certain period after the gift is made. The maximum amount is often the lesser of the annual exclusion or the value of the gift made to the trust. The settlor of a Crummey trust establishes the precise characteristics of a Crummey power. Typically, the power is exercisable for 30 days after the gift is made and permits withdrawals up to $5,000 or 5% of the value of the trust. A beneficiary may allow the power to lapse without making any demand for distribution.
For example, if a parent sets up a Crummey trust for their child and gifts $20,000 to the trust, the child may have the right to withdraw up to $10,000 of that gift within 30 days. If the child does not exercise the Crummey power within that time frame, the right to withdraw lapses.
The purpose of the Crummey power is to allow the donor to take advantage of the annual exclusion for gift tax purposes while still retaining some control over the gifted assets. By allowing the beneficiary to withdraw the gifted amount, the donor can ensure that the gift is not considered a testamentary transfer and is therefore not subject to estate tax.