Proper Crummey Trust Setup
- NewMoneyMustBeSmart
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Proper Crummey Trust Setup
I'm trying to figure out optimal way to do a Crummey Trust, and have found not all the trust and estate attorneys agree.
How should we set up the Crummey Trusts for the kids?
Strawman Proposal:
1. Trust 1 - Wife's Family Crummy Trust - Beneficiary - 3 Kids equally - Husband is Trustee, Wife is Grantor
2. Trust 2 - Husband's Family Crummy Trust - Beneficiary - 3 Kids equally - Wife is Trustee, Husband is Grantor
3. Each year, the Husband (me) and the Wife (my wife) put X dollars into the trust, we write a letter to kids giving them 30 days to take out the gift, else it stays in trust to control it
Goals:
1. Give money to kids outside of estate tax (e.g. if our estate on death exceeds lifetime exemption, have previously given gifts to children that will not be taxed on our death)
2. Provide reduced taxes if our estate is worth >$30M when we die (and assuming the lifetime exemption for me and my wife is lower than our estate value; we assume our net worth will be over the lifetime exemption when we die)
3. Minimize the taxes to the trust during our lifetime
4. Kids/Grandkids don't pay tax on the gift when we distribute it to them or when we die
5. Not allow kids to have control over the money or assets except for the 30 day Crummey Window or when we choose to dissolve trust and pass to them
6. Give the money or assets to the kids out of the trust when we feel it is in their best interest
Assumptions:
1. The amount we can give this year is $15k per spouse (2) and per child (3) pair. So 6 X $15k = $90k = $45k per trust. This is based on this year's exemption. If next year it were to go to $16k per annual gift, then we'd do $16k*6 = $96k total = $48k per trust.
2. We can use a proper Crummey form letter for the letter on gift, one letter per trust*kid so 6 letters total
3. The taxes on the trust will be paid by the trust
4. The trust will need an EIN
5. The trust will file an annual tax return
Questions:
1. Is there a way to have the grantor pay the taxes on the trust's income AND have the value and gain and income outside of the grantor's estate?
2. If we put $93k in 2021+2022 and for illustrative purposes it's worth $1M in 2045 with $907 of capital gains - what taxes are due on distribution and who pays them?
3. How would you recommend structuring the Crummey Trust to meet the 6 goals listed above?
4. Are there any suggestions you'd have about additional goals or changing the goals because of possible unintended consequences?
5. Any other suggestions?
Thanks so much!
How should we set up the Crummey Trusts for the kids?
Strawman Proposal:
1. Trust 1 - Wife's Family Crummy Trust - Beneficiary - 3 Kids equally - Husband is Trustee, Wife is Grantor
2. Trust 2 - Husband's Family Crummy Trust - Beneficiary - 3 Kids equally - Wife is Trustee, Husband is Grantor
3. Each year, the Husband (me) and the Wife (my wife) put X dollars into the trust, we write a letter to kids giving them 30 days to take out the gift, else it stays in trust to control it
Goals:
1. Give money to kids outside of estate tax (e.g. if our estate on death exceeds lifetime exemption, have previously given gifts to children that will not be taxed on our death)
2. Provide reduced taxes if our estate is worth >$30M when we die (and assuming the lifetime exemption for me and my wife is lower than our estate value; we assume our net worth will be over the lifetime exemption when we die)
3. Minimize the taxes to the trust during our lifetime
4. Kids/Grandkids don't pay tax on the gift when we distribute it to them or when we die
5. Not allow kids to have control over the money or assets except for the 30 day Crummey Window or when we choose to dissolve trust and pass to them
6. Give the money or assets to the kids out of the trust when we feel it is in their best interest
Assumptions:
1. The amount we can give this year is $15k per spouse (2) and per child (3) pair. So 6 X $15k = $90k = $45k per trust. This is based on this year's exemption. If next year it were to go to $16k per annual gift, then we'd do $16k*6 = $96k total = $48k per trust.
2. We can use a proper Crummey form letter for the letter on gift, one letter per trust*kid so 6 letters total
3. The taxes on the trust will be paid by the trust
4. The trust will need an EIN
5. The trust will file an annual tax return
Questions:
1. Is there a way to have the grantor pay the taxes on the trust's income AND have the value and gain and income outside of the grantor's estate?
2. If we put $93k in 2021+2022 and for illustrative purposes it's worth $1M in 2045 with $907 of capital gains - what taxes are due on distribution and who pays them?
3. How would you recommend structuring the Crummey Trust to meet the 6 goals listed above?
4. Are there any suggestions you'd have about additional goals or changing the goals because of possible unintended consequences?
5. Any other suggestions?
Thanks so much!
-- |
Few are those who see with their own eyes and feel with their own hearts - Einstein |
*Everything I write here is an unreliable opinion*
Re: Proper Crummey Trust Setup
Assumption 3 is incorrect for several reasons. See Internal Revenue Code Sections 672(e) and 674(a).NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 1:30 pm
Assumptions
,,,
3. The taxes on the trust will be paid by the trust
4. The trust will need an EIN
5. The trust will file an annual tax return
Assumption 4 is incorrect. See Treas. Reg. § 301.6109-1(a)(2)(i)(b).
Assumption 5 is incorrect. See Treas. Reg. § 1.671-4.
1. You're half way there. The trusts, as described, will be grantor trusts, so that the grantor will be taxable on the trust's income. However, the trusts, as described, may be in the grantors' estates under the reciprocal trust doctrine. See the article that Marty Shenkman and I wrote on reciprocal trusts in the April 2012 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... ctrine.pdf. To keep them out of the grantors' estates, make them non-reciprocal, or, better yet, just do one trust.NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 1:30 pm
Questions:
1. Is there a way to have the grantor pay the taxes on the trust's income AND have the value and gain and income outside of the grantor's estate?
...
This should be a routine matter for any law firm with a good trusts and estates group.
Re: Proper Crummey Trust Setup
Your strawman example seems to suggest some sort of pot trust, which is problematic. You need six different trusts for six different family units, but I would not gift to the spouses (personal professional preference). All six could be managed by the same trustee to save on expenses, but they need to be separate trusts or sub trusts to avoid managerial issues.
Also, you can be both grantor and trustee of a Crummey trust.
Also, you can be both grantor and trustee of a Crummey trust.
- TomatoTomahto
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Re: Proper Crummey Trust Setup
OP, just curious, what’s the benefit of having a Trust 1 and Trust 2?
We do essentially what you’re doing, but have only one trust (I’m trustee, wife is grantor, and Form 709 clarifies that gifts are equally divided between us).
We do essentially what you’re doing, but have only one trust (I’m trustee, wife is grantor, and Form 709 clarifies that gifts are equally divided between us).
I get the FI part but not the RE part of FIRE.
- NewMoneyMustBeSmart
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Re: Proper Crummey Trust Setup
Thanks for your kind and wise input.bsteiner wrote: ↑Sat Nov 27, 2021 2:12 pm1. You're half way there. The trusts, as described, will be grantor trusts, so that the grantor will be taxable on the trust's income. However, the trusts, as described, may be in the grantors' estates under the reciprocal trust doctrine. See the article that Marty Shenkman and I wrote on reciprocal trusts in the April 2012 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... ctrine.pdf. To keep them out of the grantors' estates, make them non-reciprocal, or, better yet, just do one trust.NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 1:30 pm
Questions:
1. Is there a way to have the grantor pay the taxes on the trust's income AND have the value and gain and income outside of the grantor's estate?
...
Reading through the article "Beware of the Reciprocal Trust Doctrine" it states:
I'm not legally trained, can you help me understand? In my strawman, the beneficiaries are the kids and not inclusive of either spouse. Wouldn't that moot the risk of them being declared reciprocal, as they share the same beneficiaries? In other words, since the trusts are not for the benefit of the spouse or wife, there's no reciprocal benefit, it's all for the kids?The doctrine states that if a husband creates a trust for his wife, and the wife creates a nearly identical trust for the husband, then the two trusts may be “un-crossed” and treated for tax purposes as if each spouse had created a trust for himself or herself.
You wrote:
Perhaps this is accomplished by not having the spouse or wife as a beneficiary?To keep them out of the grantors' estates, make them non-reciprocal, or, better yet, just do one trust.
If we simply set it up 1 pot trust with both of us as the grantors and trustees, does that achieve optimal tax treatment:
1. Taxed to grantors
2. Outside of grantor's estate
?
is there any apparent benefit to having the grantor and trustee be separate? For some reason I thought it was a tax test if the grantor and trustee were the same.
Thanks!
Last edited by NewMoneyMustBeSmart on Sat Nov 27, 2021 3:11 pm, edited 2 times in total.
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Few are those who see with their own eyes and feel with their own hearts - Einstein |
*Everything I write here is an unreliable opinion*
- NewMoneyMustBeSmart
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Re: Proper Crummey Trust Setup
delete - accidental double post
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Few are those who see with their own eyes and feel with their own hearts - Einstein |
*Everything I write here is an unreliable opinion*
- NewMoneyMustBeSmart
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Re: Proper Crummey Trust Setup
Thanks, Lee_WSP! I initially thought 6 trusts made sense - Parent*Child. But I reas some other things which suggested they should be aggregated.Lee_WSP wrote: ↑Sat Nov 27, 2021 2:26 pm Your strawman example seems to suggest some sort of pot trust, which is problematic. You need six different trusts for six different family units, but I would not gift to the spouses (personal professional preference). All six could be managed by the same trustee to save on expenses, but they need to be separate trusts or sub trusts to avoid managerial issues.
Also, you can be both grantor and trustee of a Crummey trust.
So if my wife is grantor+trustee for 3 trusts, one per kid, and I do the same, that will work fine? Or would there be benefit and no harm to have us both as trustees for the trusts?
And in this case, grantors pay taxes and they flow through to our estate while alive, but the assets are outside of our estate on death?
If we just buy BRK.B and it nevers pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up? I know I'm woefully ignorant here, appreciate any illumination.
Thanks!
-- |
Few are those who see with their own eyes and feel with their own hearts - Einstein |
*Everything I write here is an unreliable opinion*
- NewMoneyMustBeSmart
- Posts: 729
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Re: Proper Crummey Trust Setup
Not sure. I thought I read in some places that the grantor and trustee needed to be different, so parents could swap the grantor and trustee role. But I'm clearly confused and seeking guidance.TomatoTomahto wrote: ↑Sat Nov 27, 2021 2:45 pm OP, just curious, what’s the benefit of having a Trust 1 and Trust 2?
We do essentially what you’re doing, but have only one trust (I’m trustee, wife is grantor, and Form 709 clarifies that gifts are equally divided between us).
Agree re: gift-splitting, if they're made together. One useless benefit of doing them separately is that they don't have be documented as split, but I don't think that's worth the splitting. I read somewhere the trust is included in your estate on death if the grantor+trustee are same, but I now think that is simply wrong.
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Few are those who see with their own eyes and feel with their own hearts - Einstein |
*Everything I write here is an unreliable opinion*
Re: Proper Crummey Trust Setup
You typically just make a trust her child and you need to contribute to it.NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 3:16 pmThanks, Lee_WSP! I initially thought 6 trusts made sense - Parent*Child. But I reas some other things which suggested they should be aggregated.Lee_WSP wrote: ↑Sat Nov 27, 2021 2:26 pm Your strawman example seems to suggest some sort of pot trust, which is problematic. You need six different trusts for six different family units, but I would not gift to the spouses (personal professional preference). All six could be managed by the same trustee to save on expenses, but they need to be separate trusts or sub trusts to avoid managerial issues.
Also, you can be both grantor and trustee of a Crummey trust.
So if my wife is grantor+trustee for 3 trusts, one per kid, and I do the same, that will work fine? Or would there be benefit and no harm to have us both as trustees for the trusts?
And in this case, grantors pay taxes and they flow through to our estate while alive, but the assets are outside of our estate on death?
If we just buy BRK.B and it nevers pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up? I know I'm woefully ignorant here, appreciate any illumination.
Thanks!
You typically want to gift high basis assets because low basis assets will receive a step up basis if it passes through your estate.
Last edited by Lee_WSP on Sat Nov 27, 2021 5:42 pm, edited 1 time in total.
Re: Proper Crummey Trust Setup
This seems backwards. You would want low basis (more gains) assets to get step up, no? Did you mean "gains" rather than "basis". Maybe I am missing something.Lee_WSP wrote: ↑Sat Nov 27, 2021 3:41 pmYou typically just make a trust her child and you need to contribute to it.NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 3:16 pmThanks, Lee_WSP! I initially thought 6 trusts made sense - Parent*Child. But I reas some other things which suggested they should be aggregated.Lee_WSP wrote: ↑Sat Nov 27, 2021 2:26 pm Your strawman example seems to suggest some sort of pot trust, which is problematic. You need six different trusts for six different family units, but I would not gift to the spouses (personal professional preference). All six could be managed by the same trustee to save on expenses, but they need to be separate trusts or sub trusts to avoid managerial issues.
Also, you can be both grantor and trustee of a Crummey trust.
So if my wife is grantor+trustee for 3 trusts, one per kid, and I do the same, that will work fine? Or would there be benefit and no harm to have us both as trustees for the trusts?
And in this case, grantors pay taxes and they flow through to our estate while alive, but the assets are outside of our estate on death?
If we just buy BRK.B and it nevers pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up? I know I'm woefully ignorant here, appreciate any illumination.
Thanks!
You typically want to gift No basis assets because high basis assets will receive a step up basis if it passes through your estate.
Once in a while you get shown the light, in the strangest of places if you look at it right.
- NewMoneyMustBeSmart
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Re: Proper Crummey Trust Setup
I'll defer to Lee_WSP or others, but here's what I think:
1. If one puts low basis assets into the trust, the Fair Market Valuation (FMV) will be used to calculate the gift exemption, and they will come laden with built in realizable capital gains that are within the estate. These gains will stepped up to the value when the grantor dies, which will detract from the grantor's estate tax exemption (which is the remaining lifetime gift exemption).
2. If one puts cash into the trust, and then the assets increase, the gain is outside of the estate (I think?) and the gains are there fore not stepped up, but passed on the beneficiary. But I'm certainly not sure of that.
In my case, we're trying to get capital gains growth outside of the estate, so that the kids won't need to consume our exemption on our death, and that will be used separately as we pass our assets to them when we pass. But, am certainly not sure that I understand this at all.
Goal is to give enough to kids before we die so that our remaining estate is under the tax-free exemption. We also want to maintain control for some time through the Crummey Trust so they are not overly incentivized to not work (and this is a potentially huge off-topic discussion ).
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Few are those who see with their own eyes and feel with their own hearts - Einstein |
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Re: Proper Crummey Trust Setup
I edited it to make more sense (as I said the same thing twice). Which is to say it says what you suggested.marcopolo wrote: ↑Sat Nov 27, 2021 4:00 pmThis seems backwards. You would want low basis (more gains) assets to get step up, no? Did you mean "gains" rather than "basis". Maybe I am missing something.Lee_WSP wrote: ↑Sat Nov 27, 2021 3:41 pmYou typically just make a trust her child and you need to contribute to it.NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 3:16 pmThanks, Lee_WSP! I initially thought 6 trusts made sense - Parent*Child. But I reas some other things which suggested they should be aggregated.Lee_WSP wrote: ↑Sat Nov 27, 2021 2:26 pm Your strawman example seems to suggest some sort of pot trust, which is problematic. You need six different trusts for six different family units, but I would not gift to the spouses (personal professional preference). All six could be managed by the same trustee to save on expenses, but they need to be separate trusts or sub trusts to avoid managerial issues.
Also, you can be both grantor and trustee of a Crummey trust.
So if my wife is grantor+trustee for 3 trusts, one per kid, and I do the same, that will work fine? Or would there be benefit and no harm to have us both as trustees for the trusts?
And in this case, grantors pay taxes and they flow through to our estate while alive, but the assets are outside of our estate on death?
If we just buy BRK.B and it nevers pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up? I know I'm woefully ignorant here, appreciate any illumination.
Thanks!
You typically want to gift No basis assets because high basis assets will receive a step up basis if it passes through your estate.
Re: Proper Crummey Trust Setup
We're also working through a Crummey trust for our kids as well, for the exact same reasons.
Our estate atty explains we have to find an independent trustee (either individual or corporate). I'd be surprised if you could have your wife as the trustee, as IRS could argue that the trust was not really outside the estate. If I understand correct,yl, Crummey trust must be an irrevocable trust to enable the growth outside of the estate.
Our estate atty explains we have to find an independent trustee (either individual or corporate). I'd be surprised if you could have your wife as the trustee, as IRS could argue that the trust was not really outside the estate. If I understand correct,yl, Crummey trust must be an irrevocable trust to enable the growth outside of the estate.
Re: Proper Crummey Trust Setup
Could one do tax-gain harvesting with investments in a Crummey trust ? Thank you.
Re: Proper Crummey Trust Setup
So even it's a grantor trust and the grantor pays the taxes, s/he has to use the compressed tax brackets ?
Also,
I would like to know the answers to these questions too. Will there be taxes on the $907K capital gain or not? Please! Thank you.NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 3:16 pm If we just buy BRK.B and it nevers pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up?
Re: Proper Crummey Trust Setup
Marty Shenkman and I wrote an article on this in the December 2015 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... states.pdf. If the trust is a grantor trust, the grantor could buy the asset back before death so as to get a basis step-up. There wouldn't be any gain on the sale.NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 3:16 pm ...
If we just buy BRK.B and it never pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up? ...
It shouldn't come as a surprise. That's a common approach.
Why do you think the IRS could make that argument?
Re: Proper Crummey Trust Setup
Why would you want to gain harvest when it's taxed to yourself? There are very few situations where gain harvesting makes sense.goGators wrote: ↑Sun Nov 28, 2021 5:32 pmSo even it's a grantor trust and the grantor pays the taxes, s/he has to use the compressed tax brackets ?
Also,I would like to know the answers to these questions too. Will there be taxes on the $907K capital gain or not? Please! Thank you.NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 3:16 pm If we just buy BRK.B and it nevers pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up?
Re: Proper Crummey Trust Setup
I incorrectly thought the tax brackets were not compressed for a grantor trust. However, would it be better to gain harvest over multiple years at lower tax brackets to minimize the large tax bill at the end?
Re: Proper Crummey Trust Setup
Grantor trusts are taxed to the grantor. Crummey trusts do not typically have that feature, but they can.
You'd have to personally be in one of those zero cap gains rates brackets to benefit, but it gets the question of why you're gifting money away in the first place when you don't have much.
Remember, qualified dividends count towards the brackets. And the ultimate beneficiary of the trust is not you.
Re: Proper Crummey Trust Setup
I try not to hijack the thread so let's use OP's example.
Let's also assume that most (90%+) of my assets are in Roth accounts and generate $0 tax when withdrawn. Would it be then advisable to do gain harvesting each year to bring up the BRK.B basis?NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 3:16 pm ...
If we just buy BRK.B and it never pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up? ...
...or on my death bed I could withdraw $1M from my Roths and do a swap as Bruce Steiner pointed out
Thank you Mr. Steinerbsteiner wrote: ↑Sun Nov 28, 2021 5:43 pm Marty Shenkman and I wrote an article on this in the December 2015 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... states.pdf. If the trust is a grantor trust, the grantor could buy the asset back before death so as to get a basis step-up. There wouldn't be any gain on the sale.
Re: Proper Crummey Trust Setup
The typical way to make the trust intentionally defective is with a swap power. You would swap the low basis asset out for cash or a high basis asset before death so as to receive the step up in basis. As Bruce pointed out. Did you read the article?goGators wrote: ↑Mon Nov 29, 2021 9:13 amI try not to hijack the thread so let's use OP's example.Let's also assume that most (90%+) of my assets are in Roth accounts and generate $0 tax when withdrawn. Would it be then advisable to do gain harvesting each year to bring up the BRK.B basis?NewMoneyMustBeSmart wrote: ↑Sat Nov 27, 2021 3:16 pm ...
If we just buy BRK.B and it never pays a dividend, and there's no taxes - what do they kids do when they get the $93k basis BRK.B hypothetically worth $1M on our death? Do they pay taxes when they sell? Or is there a step up? ...
...or on my death bed I could withdraw $1M from my Roths and do a swap as Bruce Steiner pointed outThank you Mr. Steinerbsteiner wrote: ↑Sun Nov 28, 2021 5:43 pm Marty Shenkman and I wrote an article on this in the December 2015 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... states.pdf. If the trust is a grantor trust, the grantor could buy the asset back before death so as to get a basis step-up. There wouldn't be any gain on the sale.
Gain harvesting hardly ever makes sense and I cannot come up with many plausible scenarios where you'd want to do it with a Crummey trust.
Re: Proper Crummey Trust Setup
I did try to read the article but there were things which I did not grasp completely. Similar to OP, I've just begun to learn about ways to minimize estate taxes. I find trust terminology is quite confusing and really hard to understand for a beginner like me. So I'm grateful for people like you who take the time to explain these stuffs to me. Thank you!Lee_WSP wrote: ↑Mon Nov 29, 2021 9:40 am The typical way to make the trust intentionally defective is with a swap power. You would swap the low basis asset out for cash or a high basis asset before death so as to receive the step up in basis. As Bruce pointed out. Did you read the article?
Gain harvesting hardly ever makes sense and I cannot come up with many plausible scenarios where you'd want to do it with a Crummey trust.