Crummey notices: how to send them, when, and what records to keep

Why the notice matters

The annual gift exclusion covers gifts the recipient can enjoy right away. A gift into a trust that pays out years from now doesn’t qualify on its own. A Crummey power fixes that by giving each beneficiary a short window to withdraw their share of each new gift; if they don’t, the money stays in the trust.

The IRS has said the right only counts if the beneficiary knows about it and has a reasonable time to use it (Revenue Ruling 81-7). A 2011 Tax Court memorandum opinion (Turner) said actual notice wasn’t required, but it isn’t binding precedent, and advisors still treat a written notice as the safe course. The notice is the evidence that the right was real.

How the process works, every time money goes in

1. The grantor gives money to the trust, usually by check or transfer into the trust’s own account.
2. The trustee sends each beneficiary (or a minor beneficiary’s parent or guardian, as the trust provides) a written notice.
3. The withdrawal window runs for the period the trust document sets.
4. Beneficiaries can sign and return an acknowledgment. They don’t have to, but it’s strong proof they were told.
5. When the window closes, the trustee uses the money as the trust allows, for example to pay the insurance premium. Many attorneys advise leaving the money available in the trust account until the window closes.
6. The trustee files the notice, any acknowledgment, the deposit record and the premium payment together.

What the notice should say

• The trust’s name and the trustee’s name.
• The date and amount of the gift, and the beneficiary’s share of it.
• That the beneficiary has the right to withdraw that share.
• The deadline, and how to exercise the right (for example, a written request to the trustee).
• The trustee’s signature and the date the notice was sent.

Use the wording your attorney provides. The goal is a notice anyone could read years later and understand exactly what right existed and when.

The 5-and-5 wrinkle

When a beneficiary lets a withdrawal right expire, the tax code can treat part of that lapse as a gift from the beneficiary to the trust’s other beneficiaries. The lapse is ignored only up to the greater of $5,000 or 5% of the trust’s assets (26 U.S.C. 2514(e)). Trusts handle this in different ways, such as capping each withdrawal right or carrying forward the unused amount. Your attorney will know which approach your trust uses; the trustee just needs to follow it consistently.

Records to keep, and the gift tax return

For each gift, keep the notice, proof it was sent, any acknowledgment, the deposit into the trust account, and what the money paid for. The grantor generally files a gift tax return (Form 709), due April 15 of the following year, if gifts to any one person exceed the annual exclusion, if a gift is a future interest that doesn’t qualify, or if spouses split gifts. Your CPA will want the year’s notices to prepare it.

Common questions