Crummey Power
A Crummey power is a temporary withdrawal right (typically 30 days) granted to trust beneficiaries when the grantor contributes to the trust. The right qualifies the contribution as a 'present interest' under §2503(b), making it eligible for the annual gift-tax exclusion ($19,000 per donor per recipient for 2026). Named after Crummey v. Commissioner (397 F.2d 82, 1968).
The annual gift-tax exclusion requires the gift to be a 'present interest' — the recipient must have an immediate, unrestricted right to enjoy the property. A typical irrevocable trust gift fails this test because the beneficiary has only a future interest (eventual distribution per trust terms). Crummey solved the problem by carving out a temporary withdrawal right: at the time of contribution, the beneficiary has a right to withdraw their share of the contribution. This right is 'present' enough to qualify for the exclusion, even though beneficiaries are expected NOT to exercise it (exercise would defund the trust).
The mechanics: each year, the grantor contributes to the trust. The trustees send 'Crummey letters' (notice of withdrawal right) to each beneficiary, specifying the amount they could withdraw and the deadline (typically 30 days). After the deadline expires unused, the contribution becomes part of the trust corpus subject to normal trust terms. The IRS has accepted as little as 15-day windows; 30 days is the practical norm.
The documentation matters. The IRS has occasionally challenged Crummey arrangements where the beneficiary list is implausibly large (e.g., remote contingent beneficiaries who have no real expectation of trust benefit), where notice was not sent, or where the beneficiary has signaled — explicitly or implicitly — that exercise would not be tolerated. Most practitioners send Crummey letters with documented receipt (certified mail or email read-receipt) and have beneficiaries acknowledge in writing that they understood the withdrawal right and chose not to exercise.
A hybrid 'lapsing-Crummey' approach is common in ILITs to avoid §2514 reciprocal-grant attribution. The withdrawal right lapses at the lower of $5,000 OR 5% of the trust's assets ('5-and-5'), making the lapse non-taxable under §2514(e). Lapses above the 5-and-5 limit are treated as gifts back from the beneficiary to the trust, which can complicate gift-tax accounting.
Synthetic households with ILITs and other Crummey-using trusts should track per-contribution Crummey-letter dates, beneficiary-list, withdrawal-amounts, and beneficiary-acknowledgment status. Audit-grade test data should produce defensible Crummey paper trails — missing letters or implausibly-large beneficiary lists should appear as flagged scenarios.
Common pitfalls
- Failing to send Crummey letters annually — missing letters disqualify the gift from the annual exclusion.
- Including beneficiaries with no realistic expectation of trust benefit — IRS challenges have rejected exclusions where beneficiary lists were 'too clever'.
- Treating the lapse of withdrawal as automatic — the §2514 reciprocal-attribution risk above 5-and-5 is real.
- Letting the trustee imply (or worse, state) that exercise would not be tolerated — this can disqualify the present-interest characterization.
Examples
Grantor with 4 grandchildren contributes $50,000 to ILIT for premium payment. Trustees send Crummey letters to each grandchild specifying $12,500 withdrawal right ($50,000 ÷ 4) for 30 days. All 4 letters certified-mailed; all 4 grandchildren respond declining to exercise. After 30 days, $50,000 funds the premium. Each $12,500 contribution qualifies for the 2026 $19,000 annual exclusion. No gift-tax cost; no exemption used.