How to Set Up a Crummey Trust

Named for Clifford Crummey, the Crummey trust is meant to help parents save for their child's college education. The trust works when a parent, grandparent, friend or relative contributes to a trust in the form of a gift. The beneficiary is then given the opportunity to withdraw the gift or allow it to stay in the trust and be disbursed by the trustee as needed for educational expenses.

Things You'll Need

• Trustee
• Investment money
• Estate-planning attorney

Instructions

1. Evaluate your financial situation and decide how much you wish to put into each trust, each year. Remember that if you set up the fund early in your child's life, it will allow you to make many smaller contributions over several years and help you utilize tax-free gift giving each year.

2. Decide at what age the beneficiary for each Crummey trust may withdraw the money. This is essentially how you can specify that the money be available for college or postgraduate education.

3. Decide on the limit you wish the beneficiary to withdraw at one time. You can set up the trust to make sure the beneficiary does not squander the money quickly but has enough for each year of college, for example.

4. Consider setting up the Crummey trust with an irrevocable life insurance trust. This will allow you to provide for your children or grandchildren and prevent your estate from being taxed.

5. Make gifts to the Crummey trust for the beneficiary. Remember, once a gift has been made, it cannot be taken back or returned to you for any reason.

6. Contact the beneficiary or his representative via the trustee for the trust. Inform him that there has been a gift or contribution made to the trust. The beneficiary now has a short period of time (ranging from a few days up to 2 months, depending on the terms of the trust) to either withdraw the gift or allow it to sit in the trust.

Tips & Warnings

• Once you notify the trustee that there has been a contribution to the trust, he will let the beneficiary know and decide if she wishes to take the gift out of the trust or let it remain. If she refuses the gift at that time, it stays in the trust until the trustee bequeaths the funds for education or medical expenses. All funds will be disbursed to the beneficiary upon turning 35 years old.

• A Crummy trust once allowed children to use the funds for education, tax free, under the Kiddie Tax laws. The tax laws have changed, however, and there are certain penalties for using these funds as soon as they become available to the beneficiary.