Considerations When Combining Crummey Powers with Total Discretionary Trusts

Total discretionary inter vivos trusts have many benefits, like taking care of multiple generations’ needs and protecting those who can’t handle money or have addictions. Adding Crummey powers to these trusts can have consequences for gift tax, but it can still save taxes for other beneficiaries. It might be helpful when the settlor is worried about future creditors. The settlor can also exclude the use of Crummey powers for future contributions to protect against creditors. If a trust is set up for a child who has trouble managing money, the grandchildren are likely to be named as beneficiaries. This creates a situation where there may be tax considerations regarding generation-skipping and gift taxes. Including Crummey powers in the trust can also impact these taxes. It’s important to understand the tax laws that apply to these situations. If a grandchild doesn’t use their right to take money from a trust, it could have tax consequences. If the amount they could have taken is more than $5,000 or 5% of the trust’s value, it could be considered a release and they might have to pay taxes. This is because the trust might have to give them the money anyway, and they might have to pay taxes on it. So, it’s important to think carefully before letting the right to take money from a trust lapse. In the first example, if a grandchild has the right to withdraw money from a trust and doesn’t use it all, as long as the lapsed amount is less than $5,000, it’s not considered a distribution or a gift, so no taxes are owed.

In the second example, if the grandchild has the right to withdraw more than $5,000 and doesn’t use it, it could be considered a taxable distribution or termination, and taxes may be owed.

Overall, if the lapsed amount is within the safe harbor amount, there are no tax consequences. The grandchild has the power to withdraw money from the trust, but if they withdraw more than $5,000 or five percent of the trust, it’s considered a release. This means the grandchild has to give the excess amount (in this case $8,000) back to the trust. This is treated as a taxable distribution, meaning the grandchild has to pay generation skipping taxes on this amount. However, since it’s a deemed distribution and not an actual distribution of money to the grandchild, they don’t have the money to pay the tax. As for gift tax consequences, the grandchild is considered to have made a gift to the trust of the excess amount, which could have tax implications. Basically, whether a gift is completed for tax purposes depends on whether the trust is set up for the grandchild and if creditors can access the trust. If both are true, then there may not be a completed gift. In Florida, if the grandchild can withdraw more than a certain amount from the trust, then it’s considered a self-settled trust and no completed gift is made. If the grandchild can only withdraw a certain amount, then it is a completed gift when they give up that right. In the examples in this article, the grandchild can only withdraw a certain amount, so there is a completed gift when they give up that right. When a child has a Crummey power in a trust, there are no tax consequences when the child chooses not to withdraw money from the trust. The child can’t gift the money to themselves, and the gift goes to the other beneficiaries of the trust. If the child is the only beneficiary with a withdrawal right, they won’t face any tax consequences if they choose not to use it. If there’s more money in a trust than the safe amount, the child is considered to have given that extra money to the trust and then taken it back. This has tax implications, but if the child is the settlor’s grandchild, there’s no tax on the money given to the child. But if the child’s own grandchildren could get money from the trust in the future, some of the child’s tax exemption has to be set aside for that. If a parent wants to give money to a trust for their child, the child won’t be taxed on the gift. But if the child is also giving money to others from the trust, they may have to pay gift taxes. To avoid this, the parent can use a special exemption to protect the trust from taxes. If the trust has a “Crummey power,” the child can only withdraw a limited amount of money each year to avoid taxes. This might not be the best option, as it limits the parent’s ability to give gifts. One way to maximize the benefit of the gift tax exclusion is to give the person with the withdrawal right the power to control extra money through a will. This means they won’t have to pay gift tax on the extra money. Another option is to hold onto the extra money until the withdrawal right can be used on it in the future. This is called a hanging power. A more complicated option is called a cascading Crummey power, but it may be the best choice despite being difficult to manage. When using a hanging power in a trust, it’s important to understand that the person with the power can withdraw not only the amount that currently lapses, but also all amounts from previous years that have not fully lapsed yet. This can be a lot of money and could go against the original purpose of the trust. It’s also important to know that creditors can reach the money that the power holder can withdraw, including amounts from previous years. This could cause problems if the beneficiary has future creditor issues. It’s a good idea to talk to a trust protector if this is a concern for the trust. A trust with Crummey powers for the settlor’s children may qualify for automatic allocation of GST exemption, but it’s not guaranteed. The rules need to be checked each year to see if the trust qualifies. If the child can only withdraw up to the annual exclusion amount, or if they have no withdrawal rights, the trust will likely qualify. However, if the child can withdraw more than the annual exclusion amount and has a hanging power over the excess, the trust may not qualify for automatic allocation of GST exemption. A total discretionary trust gives the trustee complete control over when and how to give out money from the trust. This is becoming more popular for clients. Crummey powers are one way to make this type of trust even better. This article will talk about other types of special powers that can be used with these trusts. These powers can have different consequences. Thanks for reading! This article discusses different issues related to estate planning and taxes. The author is a lawyer who works for a big bank. The article shares the author’s opinions and doesn’t represent the bank’s views. This article was written for the Tax Section and should only be considered as the author’s opinion, not the bank’s.

Source: https://www.floridabar.org/the-florida-bar-journal/considerations-when-combining-crummey-powers-with-total-discretionary-trusts/