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The GST Tax Annual Exclusion and Crummey Trusts: A Potential Trap for the Unwary

April 10, 2023 CSBB Blog

A common question that arises when preparing federal gift tax returns is whether a gift in trust qualifies not only for the gift tax annual exclusion but also for the lesser know (and lesser understood) generation-skipping transfer (“GST”) tax annual exclusion.  This article will clarify when gifts in trust qualify for both the gift and GST tax annual exclusions.

Gift Tax Annual Exclusion

A gift up to the annual exclusion amount is not subject to federal gift tax.  The annual exclusion amount is adjusted for inflation from time to time, and the amount is currently $17,000.  There is no limit on the number of people you may make gifts to that qualify for the annual exclusion; moreover, a married person may effectively double this amount by electing to split gifts for the year with his or her spouse.  For example, a married person with 4 children and 12 grandchildren can give away $544,000 free of gift tax each year (i.e., 16 donees, multiplied by the $17,000 annual exclusion amount, multiplied by 2 for gift-splitting).  One caveat is that a gift in trust generally does not qualify for the annual exclusion, unless the trust provides the beneficiaries with withdrawal rights, which will effectively convert a gift of a “future interest” to a “present interest,” as only gifts of present interests qualify for the annual exclusion.  Trusts with these powers are sometimes referred to as “Crummey trusts,” named after the Tax Court case approving the present interest conversion technique.

GST Tax Annual Exclusion

Turning to GST tax, a gift that qualifies for the annual exclusion will also qualify for the GST tax annual exclusion provided that the gift (i) is a direct skip for GST tax purposes (e.g., a gift to a skip person—typically a grandchild or more remote descendant) or (ii) is made to a trust where a skip person is the sole beneficiary and the assets are included in the skip person’s gross estate for federal estate tax purposes.  This special type of trust is commonly referred to as a “2642(c) trust,” named after the applicable Internal Revenue Code provision. 

The important takeaway here is that transfers to trusts with withdrawal rights that qualify for the gift tax annual exclusion do not necessarily qualify (or typically) for the GST tax annual exclusion.  For example, an annual cash gift to a typical life insurance trust (commonly referred to as an “ILIT”) may not be subject to gift tax because of withdrawal rights but will be subject to GST tax and thereby require use of the donor’s GST tax lifetime exemption amount.

Christopher Weeg handles estate planning for clients throughout the State of Florida. You can reach Mr. Weeg or the estate planning department’s attorneys of Comiter, Singer, Baseman & Braun, LLP at (561) 626-2101.

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