First, let’s examine the  annual exclusion gifting  trust. This isn’t your  revocable trust where a  single person or a  married couple can act  as the Trustee. If the  Grantor wishes to  transfer the annual gift  exclusion amount to  the trust and have it removed from their estate as a completed gift for estate and gift tax purposes, the Trustee of the trust must send what’s called a “Crummey” withdrawal notice to each beneficiary of the trust. Although this is a terrible name for the notice, it is based on a famous 1968 case argued by an innovative attorney (Crummey v. Commissioner, 397 F.2d. 82, 88 (9th Cir. 1968)).

The Crummey notice lets the beneficiary know that a gift to the trust has been made and that they have a set period of time in which to withdraw their proportionate share of the gift (most typically 30 days). After that time period has elapsed, the withdrawal right lapses. In some cases, the Trustee then uses the money contributed to trust to purchase life insurance on the Grantor’s life or invests the money. In such a case where the purpose of the trust is to purchase life insurance, we usually refer to the gifting trust as an ILIT (Irrevocable Life Insurance Trust).

However, in many other instances, the money is invested in income-producing assets and the Trustee uses the trust income and principal to benefit the beneficiaries for their health, education, maintenance, and support.  Where an Independent Trustee is used, there is better asset protection for the beneficiaries.

Also note that the trust can be drafted with some escape clauses where we have an Interested Trustee acting as Trustee. For example, upon resignation, the power to further appoint an Independent Trustee can be given to the Interested Trustee. When considering who is an Independent Trustee versus an Interested Trustee, you need to look at the degree of relationship to the beneficiary and Grantor of the trust. If it is a first degree relative or somebody directly working for the beneficiary or Grantor, then it’s an Interested Trustee. Or if the beneficiary is serving as Trustee, the relationship is as an Interested Trustee.

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