Crummey Letters: What They Are and How They Work

A Crummey letter is a formal notice sent to the beneficiary of an irrevocable trust, informing them that a contribution has been made and that they have a temporary right to withdraw the funds. Its name comes from the 1968 court case, Crummey v. Commissioner, which established this method for trust gifts to qualify for certain tax benefits.

The primary function of this letter is to serve as evidence that the beneficiary was given a genuine opportunity to access the contributed funds. This procedural step is necessary for the gift to align with specific tax code provisions and receive favorable tax treatment.

Qualifying for the Annual Gift Tax Exclusion

Under the Internal Revenue Code, individuals can gift up to a certain amount of money to any number of people each year without paying gift tax. For 2025, this annual gift tax exclusion is $19,000 per recipient. This provision applies only to gifts of a “present interest,” where the recipient has an immediate, unrestricted right to use the property. A simple cash gift to a person is a clear example of a present interest gift.

Contributions to an irrevocable trust are considered “future interest” gifts because the trust’s terms restrict immediate access, designating the funds for a later date or a specific purpose, like paying for education or funding a life insurance policy. Future interest gifts do not qualify for the annual gift tax exclusion, which could force the gift-giver, or grantor, to use their lifetime gift tax exemption or pay gift taxes.

A Crummey letter legally transforms a future interest gift into a present interest gift. It does this by granting the beneficiary a temporary, unconditional right to withdraw the contributed amount. Even if the beneficiary does not withdraw the funds, the opportunity to do so is sufficient for the IRS to recognize the gift as a present interest, allowing the grantor to apply the annual exclusion to the trust contribution.

Required Information in a Crummey Notice

For the IRS to accept the gift as a present interest, the Crummey notice must be a formal, written document containing specific information. It must clearly state that a contribution has been made to the trust for the beneficiary’s benefit. The absence of this formal notice can invalidate the gift’s eligibility for the annual exclusion, potentially leading to tax consequences.

The notice must specify the exact dollar amount that the beneficiary has the right to withdraw. This amount is the lesser of the total contribution or the annual gift tax exclusion limit. The beneficiary needs to know the precise value of their withdrawal right to ensure there is no confusion about their access to the funds.

The letter must also define a clear and reasonable timeframe during which the beneficiary can exercise their withdrawal right; a period of 30 to 60 days is common practice. The notice must also provide explicit instructions on how the beneficiary can request the withdrawal, such as requiring a written request delivered to the trustee.

The Beneficiary’s Withdrawal Right

Upon receiving a Crummey notice, the beneficiary is presented with two options. The first is to exercise their right and withdraw the funds by following the procedure outlined in the letter within the specified time limit. If the beneficiary makes this request, the trustee is legally obligated to distribute the funds.

The second option is to allow the withdrawal right to lapse by doing nothing. If the beneficiary does not request the funds before the deadline stated in the letter, their right expires, and the contribution remains within the trust. The funds are then managed according to the trust’s long-term provisions, such as being used to pay premiums on a life insurance policy.

While the right to withdraw must be legally genuine and unrestricted, there is often a non-binding understanding among family members. The grantor’s intention is for the money to stay in the trust to achieve its ultimate financial goal. Beneficiaries often choose to let their withdrawal right lapse, preserving the grantor’s estate plan.

Trustee’s Administrative Duties

The trustee holds a significant administrative responsibility in the Crummey process. After the grantor makes a contribution to the trust, the trustee must act promptly to notify every beneficiary who has a withdrawal right. Timely notification is required to demonstrate that each beneficiary had a meaningful opportunity to access the funds.

To ensure compliance and create a clear record, the method of delivery for the notice is important. Trustees should use a delivery method that provides proof of receipt, such as certified mail or a commercial courier that tracks deliveries. While email may be permissible, physical proof of delivery is a more defensible practice in an IRS audit.

Thorough record-keeping is another duty of the trustee. The trustee must maintain a permanent file containing copies of every Crummey letter sent for every contribution. This file should also include the proof of mailing or delivery for each notice and any signed acknowledgments of receipt from the beneficiaries. These records serve as the primary evidence that the trustee properly executed their duties.