Are you a trust beneficiary
who recently received a “Crummy notice?” If so, and you have never before
received one, you may be unsure what to do next. After all, there must be some
reason why you received the notice, right? To help you better understand why
you received the notice, an Indianapolis trust attorney at Frank & Kraft
explains a Crummey notice and what to do if you received one.
To understand the
significance of a Crummey Notice you must first understand some trusts basics.
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. Sometimes, however, assets may need to be added to the trust
after the trust’s original creation. This is where a Crummey Notice comes in.
Is a Crummey Notice?
Named after the court case
that gave rise to the rule, a “Crummey Notice” 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should also provide a deadline within which the assets must be withdrawn, or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.
Do I Do If I Received a Crummey Notice?
If you recently received a
Crummey Notice, you undoubtedly want to know how to respond to it. Whether you
respond at all depends primarily on the purpose of the trust itself. It can be counter-productive for a
beneficiary to act on the 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 works by creating
an irrevocable trust and then transferring in, or purchasing, a life insurance
policy wherein the Settlor of the trust is the insured. Upon the Settlor’s
death, the proceeds of the life insurance policy are then paid out to the
trust. The terms of the trust agreement then dictate how the proceeds are
Premiums for the life
insurance policy during the time the Settlor is alive are paid by the trust.
For the Settlor, an additional benefit is available if the funds gifted to the
trust for the payment of those premiums were also tax-free. Without the
addition of a Crummey power, however, gifts to an ILIT would not be eligible
for the yearly gift tax exclusion because the gift must be one of “present
interest” to be eligible for the tax-free treatment. If the “gift” cannot be
immediately accessed by the beneficiaries, the gift creates a future interest,
not a present interest. The addition of a “Crummy power” makes the gift
eligible for the yearly gift tax exclusion.
Although the “Crummey power”
gives the trust beneficiaries the right to withdraw the funds gifted to the
trust immediately after they are transferred into the trust, doing so runs
counter to the trust purpose. Those funds are intended to be used to pay the
premiums on the life insurance policy – a policy that will ultimately pay out a
considerable sum of money to the beneficiaries after the Settlor’s death. For
an ILIT to work as intended, therefore, beneficiaries must simply ignore the
Crummy notice and forego the ability to withdraw assets.
This same logic may apply to
other trusts which is why it is in your best interest to consult with a trust
attorney if you receive a Crummy notice to ensure that you understand how best
to respond to the notice.
an Indianapolis Trust Attorney
For more information, please download our FREE
estate planning worksheet. If you have additional questions or
concerns about a Crummey notice you received, contact an
experienced Indianapolis trust attorney at Frank & Kraft by calling (317) 684-1100 to schedule an