 | John Gibson
is a senior partner in the Wichita law firm of Gilliand & Hayes. He has been practicing law for nearly 30 years. In addition to healthcare law his practice includes wills, trusts, estate planning, probate and general representation of individuals and small business. Contact information: Phone:
316-264-7321; Fax: 316-264-8614; and e-mail: jgibson@boyerds.com |
Legal
2001-07-01 16:07:00
Giving it away...
Question: My husband and I are in our late 70’s. We have one son and his wife, our daughter-in-law. Their 3 children are ages 15, 18 and 20. Even though the 18 and 20 year olds are "of age", they have not demonstrated the greatest maturity to manage money. We want to take advantage of the annual $10,000.00 tax-free gift provision of the tax laws by giving such a gift to our son, daughter-in-law, and each of our grandchildren. However, we've heard that if we attach conditions to a gift or keep control of the gift the IRS will not recognize it as a gift. We've been told that the IRS says a transfer of money is not a gift - that is, you are not really giving it away - if you keep any control over the money. Is there a way to give these gifts tax-free, yet keep enough control to assure the grandchildren will be prudent?
Answer: Fortunately, there is a way to do what you desire. You can accomplish both goals of giving the cash gifts tax-free, and maintaining a measure of control. Strange as the name may sound the estate planning concept is the "Crummey" procedure, and the document you need is a "Crummey Trust". It was named after the taxpayer whose case established the Crummey trust concept.One of the basic ways to save estate tax is to use the annual gift tax exclusion during your lifetime. This provision enables you to give away up to $10,000.00 each year to a donee without them having to pay any Federal tax on the gift (up to $20,000.00 for a joint gift by a married couple).When you make an outright gift to a donee however, you give up control over the assets. In other words, you run the risk that the money may be squandered, especially if the donee is young or irresponsible. On the other hand, if you give the gift, but keep control over it, the IRS declares it is not a gift and therefore is taxable. The Crummey trust was devised as a way around this problem. You can establish a trust and place the gift money into the trust with the grandchildren as beneficiaries, and appoint a trustee to manage the property. The beneficiaries (the grandchildren) of the trust are granted the right to withdraw the gift money from the trust immediately after the gift is made to the trust. By giving this right of withdrawal the IRS considers that the grandchildren have the unconditioned gift given to them, and the gift therefore qualifies for the gift tax exclusion. Through a specific legal document however, the grandchildren/trust beneficiaries waive the right to withdraw the money, thus the gift is able to be controlled by the giver through the trust. The money in the trust can be used for the benefit of the grandchildren and can be paid out to them at certain ages, depending on what the trust says. At the same time, the property in the trust does not have to be paid out when the beneficiary reaches a certain age, so the trust can continue for a long period of time if the givers so wish.
