Named after Clifford Crummey, a man who wanted to build a trust fund for his sons and simultaneously claim yearly tax exemption benefits too, this technique allows an individual to receive a gift tax free when it would normally be taxed. Gifts must be stipulated as being part of the trust when it is originally drafted if the Crummey power [1] is to be effective.
A provision applied to certain irrevocable trusts [2], the Crummey power allows certain trust beneficiaries to withdraw gifts made to the trust for a limited period of time. The gift placed in the trust must be no greater than $13,000 at this time. It will likely change over time as it is indexed for inflation [3]. By gifting to such a trust an individual can reduce the size of their gross estate, reducing the quantity of taxes required when the owner dies.
The power works as follows: a donor makes a contribution into their irrevocable trust [2]. The beneficiaries are informed that the funds are available and must be withdrawn within a certain time frame. The period is commonly around 30 days.
If the funds are not withdrawn then the funds go back to the trust and are subject to the annual gift tax exclusion offered by the government. It is common for the beneficiary not to withdraw the funds based upon an agreement between the trustee and the inheritor.
The trustee of the fund may then make use of the gift for other purposes permitted by the trust document. Common examples are making payments on a life insurance policy or investment.