If you are a beneficiary of an irrevocable trust, you are entitled to receive notices and communications regarding trust business. One of those notices may be what is referred to as a “Crummey” notice. Because it is important for you to have a clear understanding of your rights as a beneficiary, an Overland Park trust attorney at Parman & Easterday explains the purpose of a Crummey notice.
How Does a Trust Operate?
First and foremost you need to understand how a trust operates. 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 before the trust can begin to function. It is not uncommon, however, for assets to be added to an irrevocable trust after the original creation of the trust. When that occurs, the Trustee may be required to send out a Crummey notice to all trust beneficiaries.
What Is a Crummey Notice?
A “Crummey” notice (named after the court case that established the notice requirement) is simply 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. Along with notifying beneficiaries that assets have been added and that they have the right to withdraw those assets, the notice should also provide a deadline within which the assets must be withdrawn or the assets become trust property.
If I Received a Crummey Notice Do I Need to Do Anything?
In some instances it is counter-productive for a beneficiary to act on a Crummey notice because withdrawing the assets goes against the trust purpose. For example, if the trust is an irrevocable life insurance trust, or ILIT, you should simply ignore the notice. An ILIT is an irrevocable trust into which the Settlor transfers, or purchases, a life insurance policy in which the Settlor of the trust is the insured. Upon the Settlor’s death, the proceeds of the life insurance policy are paid out to the trust and the terms of the trust agreement dictate how the proceeds are spent.
The trust pays the life insurance policy premiums during the Settlor’s lifetime. The Settlor gifts the funds to the trust to pay the premiums on the policy and derives an added benefit if the gifted funds are tax-free. Without the addition of the so called Crummey power, however, gifts to an ILIT would not be eligible for the yearly gift tax exclusion because the gifts must be of a “present interest” to be eligible for tax-free treatment. If the “gifts” cannot immediately be claimed by the beneficiaries, the gifts creates a “future” interest, not a present interest. Adding the “Crummey power” or right to claim the gift, makes the gift eligible for the yearly gift tax exclusion. The right to withdraw the funds immediately after they are gifted to the trust is a legal formality, however, because if the funds are withdrawn by the beneficiaries, the trust would be unable to pay the premiums and the trust would fail. If the trust fails, the life insurance policy also fails – a policy intended to pay out a considerable sum of money to the beneficiaries after the Settlor’s death. In this instance, the beneficiaries of this trust should ignore the Crummey notice.
Because every trust is unique, if you receive a Crummey notice it is in your best interest to consult with a trust attorney to discuss your options.
Contact an Overland Park Trust Attorney
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to respond to a Crummey notice, contact an experienced Overland Park trust attorney at Parman & Easterday by calling 405-843-6100 to schedule your appointment today.