Dickinson, Mackaman, Tyler & Hagen, P.C.

Wait! I needed that! (Crummey Trust Edition)

Crummey Trust, Banking Law, Tax Code, Iowa

Posted on 10/26/2018 at 12:08 PM by David Gonzales

In part one and part two of this three part series, I examined the basics of Crummey Trusts for bank trustees and discussed why beneficiaries should be notified of their right to withdraw. In this final portion I’ll examine the impact of recent tax law changes encouraging some settlors to abandon their Crummey Trusts prematurely.

Late in 2017 President Trump signed Public Law 115-97, the federal budget for fiscal year 2018. Much has been written about the changes in individual income and corporate tax rates, but less attention was paid to the changes in estate tax laws affecting Crummey Trustees. Buried deep in Section 11061 is a temporary change to the amount of an estate exempt from the Federal Estate Tax. The law changes the base exclusion amount per person from $5 million to $10 million. After an adjustment for inflation the 2018 exemption for an individual is approximately $11.18 million, up from $5.49 million in 2017. A surviving spouse is allowed to exempt any unused amount of the predeceasing spouse’s exemption allowing a married couple to pass on approximately $22.36 million before being assessed Federal Estate Tax.

The doubling of the exemption is likely to make settlors of Crummey trusts with estates smaller than $10 million consider abandoning the life insurance policies held by the trust. This places the bank trustee in an awkward position. Settlors of Crummey trusts are likely one of the bank’s best customers with multiple deposit and investment accounts for both home and business. Settlors are likely paying the bank’s trust administration fee. However, because the trusts are irrevocable, the bank trustee owes fiduciary duties to the beneficiaries to manage the asset(s) in the trust for their benefit. Any time a settlor decides to quit making gifts to a Crummey trust the bank trustee must continue to do what is in the best interest of the beneficiaries and preserve the life insurance as a prudent investor would with his own asset.

This series has included a lot of sad or frustrating thoughts, after all we’re talking about death and taxes. In cases where settlors are considering abandoning a Crummey trust due to the recent change in tax law a happy thought might be just the thing to encourage a settlor to keep making contributions to their Crummey trust. The question to ask is “What happens if you live longer than you expected?”

As mentioned above, the increase in the estate tax exemption is only temporary. The new estate tax base exemption expires on January 1, 2026. At that point the amount of the exemption will plummet back to the level to which it naturally would have grown had the base exemption remained at $5 million. As long as the law remains temporary any settlor dying on January 1, 2026 may find their estate subject to estate tax in spite of the fact the entire estate would have been exempt if they died one day earlier.

Uncertainty is a constant in Crummey trust administration. Even though Crummey trusts are often only a small fraction of the trusts administered in a bank trust department, they have a disproportionate share of the risk in the portfolio. Bank trust departments should seek trusted legal counsel before any major changes to the operation of a trust under management. The banking team at Dickinson Law can help resolve your trust issues and keep your trust department’s risk as low as possible.

The material in these presentations is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.The opinions expressed in these videos are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

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