For a trust beneficiary, the receipt of a “Crummey notice” can be confusing, leaving the beneficiary unsure of what to do next. Most beneficiaries assume there is an important reason behind the notice that should spur action on their part. Typically, this is not the case. The Los Angeles trust administration attorneys at Schomer Law Group, APC explain what a Crummey notice is and what you should do if you receive one.
Trust Administration 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 during the administration of the trust. When that happens, a Crummey notice must be issued.
What 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they have the right to withdraw those assets, the notice should also provide a deadline within which the assets must be withdrawn or the assets become trust property.
Am I Required to Do Anything If I Receive a Crummey Notice?
As a trust beneficiary, you need to know how to respond if you receive a Crummey notice. 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 spent.
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.
Contact Los Angeles Trust Administration Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about a Crummey notice, contact the experienced Los Angeles trust administration attorneys at Schomer Law Group APCby calling (310) 337-7696 to schedule an appointment.
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