Mr. Blau is chief executive officer of MEDIQUS Asset Advisors, Inc., in Chicago. He can be reached at 800-883-8555 or firstname.lastname@example.org.
My husband and I are both physicians and are interested in investing for our children in such a way that those assets are protected from malpractice suits.
Q. My husband and I are both physicians and are interested in investing for our children in such a way that those assets are protected from malpractice suits. We were told a Crummey Trust is a way to invest considerable money for our children that would be exempt from lawsuits and ensure more control over how the trust is administered. Is this accurate?
Based on current tax law, the maximum allowable annual gift is $12,000 per individual or trust beneficiary. As an example, if you have three children, you would be able to make an annual gift of $36,000, and your spouse would be able to do the same, providing the opportunity to make joint total annual gifts of $72,000.
In order to bypass the adverse tax consequences associated with future interest gifts, the attorneys for the Crummey family created a process that would allow the gifts to be defined as present interest by simply allowing the trust beneficiaries the right to withdraw the gift for up to 30 days after it has been made. Because the withdrawal right begins immediately after the gift is made, it is considered to be a gift of present interest. If the child chooses not to withdraw the gift within the 30-day period, the withdrawal right lapses and the money remains in the trust until the child reaches the designated distribution age. Even if the child decides, against the wishes of the parents, to withdraw the money, he or she can only withdraw the amount of the recent gift, not the entire trust.
To satisfy this requirement, attorneys recommend that a letter be sent to the beneficiaries of the trust after the gift is made so they can be formally advised of the gift, as well as their right to withdraw the gift from the trust. Unfortunately for the Crummey family, the IRS did not agree that the gifts were of present interest and considered the gifts to be subject to gift taxes. The Crummey family went to court with the landmark Crummey v. U.S. (1968) case in which the court decided that the gifts were, indeed, of present interest because the children did have the ability to withdraw the gifts, but chose not to do so.
Crummey Trusts or other types of irrevocable trusts that use Crummey provisions are often funded with life insurance because the annual gifts can be used to pay the premiums for the coverage. If the intent is simply to protect assets, there are many other vehicles, such as family limited partnerships and asset protection types of trusts.
The true disadvantage of using a Crummey Trust for accumulating assets that are shielded from creditors is that the trust assets are not yours anymore, as they belong to the trust beneficiaries. If you have no plans to use the funds for your retirement standard of living or for other long- or short-term needs and the intent is to give those funds irrevocably to your children, it is a viable option to consider.
Be sure to consult with your tax attorney to learn more about the various advantages and disadvantages of using irrevocable trusts as an asset protection strategy.
Joel M. Blau, a Certified Financial Planner, is president of MEDIQUS Asset Advisors, Inc. in Chicago. He can be reached at 800-883-8555 or email@example.com