If I use a Crummey trust in my estate plan, what are the tax consequences?

When meeting with your estate planning attorney, you may want to minimize potential estate taxes when you die. Many people feel they do not want the wealth they worked so hard to build to be minimized by these taxes. In order to reduce the size of their estate and potentially avoid the tax, various techniques may be utilized. One such example is to create a Crummey trust to remove assets from your estate, such as a life insurance policy.

6 Potential Tax Consequences of a Crummey Trust

What are the tax consequences of using this type of trust? The following is an overview:

  1. Your irrevocable trust may be responsible for paying income taxes. This is true if the trust earns more than a certain amount each year.
  2. Depending on how the trust is drafted, the trust may need to obtain its own tax ID number. In other cases, if the trust is deemed a grantor trust for tax purposes, the grantor’s social security number is used.
  3. The trust may need to issue K-1s to the beneficiaries of the trust each year.
  4. If the grantor of the trust makes gifts to the trust in excess of the annual gift tax exemption amount, the amount exceeding the exemption may be deemed a taxable gift. A gift tax return would then need to be filed.
  5. If the proper criteria are met during your lifetime, upon your death, the trust assets will not be included in your estate for estate tax purposes.
  6. The beneficiaries of the trust will not have to pay income taxes on the life insurance proceeds that they ultimately receive.

Creating an estate plan that meets your needs and goals requires assistance from a knowledgeable professional. We encourage you to get started. Contact us today at (714) 459-5481 for more information.