Crummey Power

The annual gift tax exclusion allows a donor to give a certain amount per recipient each year free of gift tax — but only if the gift is of a "present interest," meaning the recipient can use it immediately. Contributions to a trust normally fail this test because the beneficiary cannot access the money right away. A Crummey power solves the problem by giving beneficiaries a short window — typically 30 to 60 days — to withdraw contributions. The power itself satisfies the IRS's present-interest requirement, even if the beneficiary never actually exercises it.

The name comes from a 1968 court case involving the Crummey family, whose trust arrangement the IRS challenged and lost. Today, Crummey powers are a standard feature of irrevocable life insurance trusts (ILITs) and other irrevocable trusts funded with annual exclusion gifts. A hypothetical couple funding a trust for three adult children might send Crummey notices each year to all three, multiplying the amount sheltered from gift tax.

A common mistake is treating the withdrawal right as purely ceremonial and failing to send proper written notices to beneficiaries. The IRS requires that beneficiaries receive genuine notice and a real opportunity to withdraw; sloppy administration can invalidate the exclusion. Beneficiaries who consistently exercise their withdrawal rights — actually taking the money — can also undermine the trust's purpose. A qualified attorney and CPA should coordinate both the drafting and the annual administration of Crummey powers.