Are you a trust beneficiary who just received a “Crummey notice?” If so, you may be a bit confused as to the purpose of the notice. Does the notice directly impact you? Is there something you are required to do after receiving the notice? To help clarify those concerns, a North Andover area trust attorney at DeBruyckere Law Offices discusses what to do after receiving a Crummey notice.
Understanding Your Role as a Trust Beneficiary
A trust is a legal arrangement wherein one party (the “Settlor”) appoints another party (the “Trustee”) to take possession of and manage property for the benefit of a third party (the “beneficiary”). All trusts are broadly divided into testamentary and living trusts. Living trusts are then further divided into revocable and irrevocable living trusts. Initially, a trust is funded using assets designated by the Settlor. Assets may also be added to the trust after the trust is established. It is under these circumstances that a Crummey Notice is required to be sent to all trust beneficiaries.
What Is a Crummey Notice?
At its most basic, a Crummey Notice is just 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. It is referred to as a “Crummey” notice because of the court case that originally established the notice requirement. As a result of the decision in that case, the law now requires trust beneficiaries to be notified of the right to withdraw assets to ensure that the beneficiaries understand their rights. Along with notifying beneficiaries of the right to withdraw assets, a Crummey notice must include the time frame within which a withdrawal must be made.
How Do I Respond to a Crummey Notice?
If you recently receive a Crummey Notice you are probably wondering what you are supposed to do now. Often, the answer is “nothing.” The reason for that is related to the purpose of the trust. One way to reduce a taxpayer’s exposure to federal gift and estate taxes is to transfer assets during the individual’s lifetime. A taxpayer can use the yearly exclusion to make gifts of up to $15,000 to an unlimited number of beneficiaries each year without those gifts counting toward the lifetime exemption limit. Making outright gifts, however, may not be a good idea if the recipient is young or is not known for managing money well. One solution is to gift the assets using a trust which allows the Settlor of the trust to create trust terms that help control how the assets are used.
The problem with using a trust is that in order for a gift to qualify as a gift for purposes of being removed from the Settlor’s estate, it must be a present interest gift. A present interest gift is one in which the beneficiary has an immediate, unrestricted right to the use, benefit, and enjoyment of the gifted property. If the trust terms restrict when the assets can be distributed, the gift won’t qualify as a present interest gift, thereby defeating the whole purpose of creating the trust. This is where the concept of a Crummey notice comes in to play. By officially offering a beneficiary the right to withdraw assets that are gifted to the trust, the gift becomes a present interest gift.
Although a Crummey notice gives a beneficiary a legal right to withdraw assets from a trust, it is often not in the beneficiary’s best interest to act on the notice. For example, if the trust is an Irrevocable Life Insurance Trust (ILIT), withdrawing the trust assets runs counter to the goals of the trust. An ILIT works by creating an irrevocable trust and then transferring in, or purchasing, a life insurance policy wherein the Settlor is the insured. Upon the Settlor’s death, the proceeds of the life insurance policy are paid out to the trust. The terms of the trust agreement dictate how the proceeds are distributed. Premiums for the life insurance policy during the Settlor’s lifetime are paid by the trust. By utilizing a Crummey notice, the Settlor’s gifts to the trust are tax-free gifts, allowing the Settlor to purchase a valuable life insurance policy tax-free. If you are the beneficiary of the trust, withdrawing assets during the Settlor’s lifetime will defeat the purpose of the trust and result in a cancellation of the life insurance policy. Because there are numerous factors that go into the significance of a Crummey notice, it is in your best interest to consult with a trust attorney to be certain how you should respond to the notice if you receive one.
Contact a North Andover Area Trust Attorney
For more information, please join us for an upcoming FREE seminar. If you have questions or concerns about the Crummey Notice you received, contact a North Andover area trust attorney at DeBruyckere Law Offices by calling (978) 969-0331 to schedule an appointment.
Why might I want a professional Trustee?
Successfully administering a trust typically requires legal and/or financial skills that a professional is more likely to have. In addition, a neutral professional is less likely to have a conflict of interest because of a pre-existing relationship with trust beneficiaries.
What are some advantages of using a trust instead of a Will to distribute my estate?
- A trust avoids probate, allowing assets to be distributed to beneficiaries much faster.
- The terms of a trust remain private.
- A trust can also plan for the possibility of your incapacity which a Will cannot do.
Is life insurance a probate asset?
No. One of the advantages of relying on life insurance proceeds to provide for loved ones in your absence is the fact that the proceeds are considered a non-probate asset. Consequently, the proceeds can be distributed to the named beneficiaries immediately after your death.