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Trust Law/Level V · Tax and legacy/5.1 Estate and gift tax/Lesson 2

The annual exclusion and Crummey powers

Why most gifts to a trust miss the US annual gift tax exclusion, and how temporary withdrawal rights, called Crummey powers, are used to qualify them.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Give outright rather than in trust: up to $19,000 per recipient in 2026 under IRC §2503(b) needs no trust, no notice and no Form 709, provided every gift that year is a present interest and no recipient gets more.
  2. Pay tuition or medical bills straight to the school or provider: IRC §2503(e) makes these unlimited and outside the annual exclusion and Form 709; the catch is that money paid to the person, or into a 529 plan, does not qualify.
  3. Spouses can split gifts under IRC §2513 to give $38,000 per recipient in 2026, and a 529 contribution can be spread over 5 years, up to $95,000 per beneficiary; both require filing Form 709 to make the election, though no tax is due.
  4. Gifts to a US-citizen spouse are unlimited; for a non-citizen spouse the 2026 annual exclusion is $194,000 (Rev. Proc. 2025-32), and only for present-interest gifts, so larger transfers draw on the donor’s basic exclusion.
  5. Where a trust is wanted, a Crummey withdrawal right qualifies each contribution: send written notice and allow a real window, commonly 30 days (Rev. Rul. 81-7), and keep each lapse within the greater of $5,000 or 5% under IRC §2514(e).

MaterialsThe IRS gift tax FAQ page, which gives the annual exclusion for the current yearThe IRS instructions for Form 709, the gift tax returnA copy of the trust document you are reading, if you have one, to find any withdrawal clauseLesson 5.1.1, on how gifts use the basic exclusion

Wonder

  1. What happens if a beneficiary does nothing during the withdrawal window?
  2. Why does the IRS care whether a beneficiary was told about a withdrawal right?
  3. Can someone with only a contingent interest in a trust hold a withdrawal right?

Explore

  1. Under IRC §2503(b), each donor can give up to the annual exclusion to each recipient each year without it counting as a taxable gift; the IRS gives $19,000 per recipient for 2025 and 2026. The exclusion does not apply to gifts of ‘future interests’. A gift to a trust that holds the money until a later date or leaves payments to the trustee’s discretion is usually a future interest, because the beneficiary cannot use it now. Such gifts must be reported on Form 709 and use part of the donor’s basic exclusion.
  2. In Crummey v. Commissioner (9th Cir. 1968), the trust gave each beneficiary, including minors, a right to withdraw part of each year’s contribution for a limited time. The court held that this legal right to demand the money made the gifts present interests, so they qualified for the annual exclusion, even though no withdrawal was made. Trusts that use this approach are often called Crummey trusts. If a beneficiary withdraws, they take the money; if the right ends unused, the money stays in the trust under its terms.
  3. The IRS has said that a withdrawal right counts only if the beneficiary knows about it and has a reasonable time to use it. In Revenue Ruling 81-7, no exclusion was allowed where the beneficiary was not told before the right ended. Trustees therefore commonly send written ‘Crummey notices’ and keep copies, although the Tax Court has not always required actual notice. Windows of about 30 days are common in practice. These are IRS positions and practice, not a statutory form.
  4. Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991), allowed annual exclusions for withdrawal rights held by grandchildren who were only contingent remainder beneficiaries. The IRS acquiesced in the result only and has continued to challenge ‘naked’ powers, meaning withdrawal rights given to people with no other real interest in the trust, or rights that were understood never to be used. Whether a particular power qualifies depends on the trust terms and the facts.
  5. A withdrawal right that ends unused can have its own tax result for the beneficiary. Under IRC §2514(e), the lapse of such a power in a calendar year is treated as a gift by the beneficiary only to the extent that the amount exceeds the greater of $5,000 or 5% of the property subject to the power, often called the ‘5 and 5’ limit. Trust drafters handle this limit in different ways, which is one reason Crummey clauses vary.
  6. Crummey trusts are not the only route. IRC §2503(c) treats a gift to someone under 21 as a present interest if the property can be used for them before 21 and passes to them at 21. Gifts made directly, or tuition and medical bills paid directly to the provider, avoid the trust question altogether. With today’s high basic exclusion, many families would owe no gift tax even without the annual exclusion; this lesson explains the rules and does not suggest any of these arrangements.

Key facts

  • The US federal annual gift tax exclusion is $19,000 per recipient for 2025 and 2026 (IRC §2503(b)).
  • Gifts of future interests, including most gifts to a trust, do not qualify for the annual exclusion.
  • Crummey v. Commissioner (9th Cir. 1968) held that a beneficiary’s right to withdraw a contribution made it a present interest.
  • The IRS treats a withdrawal right as real only if the beneficiary knew of it and had a reasonable time to use it (Rev. Rul. 81-7).
  • Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991), allowed annual exclusions for withdrawal rights held by contingent remainder beneficiaries.
  • Under IRC §2514(e), a lapse is a gift by the beneficiary only above the greater of $5,000 or 5% of the property subject to the power.

Exercise nine, six, three, one

9CollectList up to 9 gifts you have made or might make (some people have fewer), such as cash to a child, a contribution to a trust, tuition paid to a school, a medical bill paid for someone or a gift to a spouse.
6ClusterSort them into 6 categories: direct gifts to individuals, gifts to a trust with a withdrawal right, gifts to a trust without one, tuition or medical payments made directly, gifts to a spouse, and gifts you are unsure about.
3DistillReduce the 6 categories to 3 groups: gifts that are likely present interests, gifts that are likely future interests, and gifts you would ask a tax adviser about.
1CrystallizeWrite 1 sentence explaining, in your own words, how a withdrawal right turns a gift to a trust into a present interest.

Fact check

Dates, figures and claims checked against the published sources listed below.

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