What Is a Crummey Trust and How Does It Work for Grandchildren?

The short answer: a Crummey trust is an irrevocable trust that lets you make tax-free annual gifts to a child or grandchild, up to 19,000 dollars per recipient in 2026, while keeping the money in trust for as long as you choose, instead of handing it over at 18 or 21. It works by giving the beneficiary a short window, usually 30 to 60 days after each gift, to withdraw the gift. Almost no one withdraws, the window closes, and the money stays in trust under the terms you wrote. That temporary right is what turns a gift to a trust, which the tax law would otherwise treat as a “future interest” that does not qualify for the annual exclusion, into a “present interest” that does.

The technique comes from a 1968 court decision and has been standard estate planning practice for more than fifty years. It is also easy to get wrong. This article explains how a Crummey trust works, what it costs to maintain, the generation-skipping trap that catches grandparents in particular, and how it compares to a custodial account, a 529 plan, and a minor’s trust.

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Why Does a Gift to a Trust Need Special Treatment?

Section 2503(b) of the Internal Revenue Code excludes the first 19,000 dollars of gifts to any one person in 2026 from taxable gifts, but only for gifts “other than gifts of future interests in property.” A married couple who elect to split gifts can give 38,000 dollars to each recipient. Gifts above the exclusion are not taxed immediately; they use up part of the giver’s lifetime exemption, which is 15 million dollars per person in 2026, and must be reported on a gift tax return, Form 709. Our article on whether you will owe a gift tax this year covers the mechanics.

The problem is the phrase “future interest.” A gift made outright to a grandchild is a present interest; she can spend it today. A gift to a trust that will pay her the money at 30 is a future interest, because she cannot use or enjoy it now. Without more, every dollar given to that trust is a taxable gift that eats into the lifetime exemption, no matter how small.

Grandparents who want to make annual gifts but do not want a teenager to control the money face exactly this conflict, and the Crummey trust resolves it.

How Does a Crummey Trust Work?

In 1962, D. Clifford Crummey and his wife created a trust for their four children and claimed annual exclusions for their contributions. The trust gave each child the right to demand a share of each year’s contribution until the end of the year. Two of the children were minors and never exercised the right. The Internal Revenue Service argued that a minor could not realistically demand the money, so the gift was a future interest. In Crummey v. Commissioner, decided in 1968, the Ninth Circuit Court of Appeals disagreed: what mattered was the legal right to withdraw, not the likelihood that anyone would use it, and nothing prevented a guardian from being appointed to exercise the right on a minor’s behalf.

Every Crummey trust since has followed the same design:

• The grantor makes a gift to the trustee.
• The trustee sends each beneficiary, or the parent or guardian of a minor beneficiary, a written notice that a gift has been made and that the beneficiary may withdraw their share within a stated period, typically 30 to 60 days.
• The beneficiary does nothing, the period ends, and the withdrawal right lapses.
• The gift, now in the trust, is held and invested under the trust’s terms, which can provide for education, health, and support during minority, distributions at staged ages, or even lifetime management by a trustee.

The IRS has taken the position that the withdrawal right must be real. The beneficiary must receive actual notice, must have a reasonable time to act, must be able to reach the funds without obstruction if they do act, and must not have agreed in advance never to withdraw. Our companion article, Have You Done Your Crummey Letters This Year?, walks through the notice process in detail. The one-sentence version is that a Crummey trust without Crummey letters is a trust that has been receiving taxable gifts.

Why Is a Crummey Trust Especially Useful for Grandchildren?

Because the alternatives end too soon. A custodial account under the Uniform Transfers to Minors Act must be turned over to the child when the custodianship ends, and in New Jersey, New York, and Connecticut that age is 21 for gifts made during the giver’s life. New Jersey and New York let the giver specify an earlier age down to 18 but not a later one. A grandparent who has contributed 19,000 dollars a year since a grandchild’s birth will have placed several hundred thousand dollars, plus growth, in the hands of a 21-year-old with no strings attached.

A Crummey trust has no such limit. The trust can pay for college and a first apartment, hold the balance until 30 or 35, split distributions across several ages, or keep the assets in trust for the grandchild’s life with a trustee managing them, which also shields the assets from the grandchild’s creditors and divorcing spouse in a way no custodial account can. The grandparent decides, and the decision is written into the document.

Grandparents also often want one trust for several grandchildren, including those not yet born. A single Crummey trust can name a class of beneficiaries, give each living grandchild a withdrawal right over their share of each gift, and add new grandchildren as they arrive. That flexibility comes with a tax trap described next.

What Is the Generation-Skipping Trap?

Gifts to grandchildren are subject to a second federal tax, the generation-skipping transfer tax, on top of the gift tax. Each person has a GST exemption equal to the estate tax exemption, and most families never approach it. But a Crummey trust for grandchildren can waste that exemption or, worse, leave gifts exposed to GST tax, because the annual exclusion does not carry over to the GST tax automatically.

Under Section 2642(c) of the Code, an annual-exclusion gift to a trust is automatically exempt from GST tax only if the trust has a single beneficiary during that beneficiary’s life and the trust assets will be included in that beneficiary’s estate if the beneficiary dies before the trust ends. A trust for one grandchild drafted with those terms qualifies. A trust for three grandchildren, or one that lets the trustee shift assets among them, does not. For the common multi-grandchild trust, the grantor must file a gift tax return and allocate GST exemption to each year’s gifts, even though no gift tax is due, or the trust will carry an “inclusion ratio” that exposes future distributions to a 40 percent GST tax. Many grandparents, told correctly that their gifts are “under the annual exclusion,” never file the return and never learn about the problem until the trust is audited or the grandchild receives a distribution decades later.

The practical rule is that a Crummey trust for grandchildren almost always requires a Form 709 every year, and the trust should be drafted with the GST rules in mind from the start.

What Else Can Go Wrong?

The five-and-five rule. When a beneficiary lets a withdrawal right lapse, the tax law treats the lapse as if the beneficiary released a power over the money, and a release can be a taxable gift by the beneficiary to the other beneficiaries of the trust. Section 2514(e) exempts lapses up to the greater of 5,000 dollars or 5 percent of the trust’s assets each year. A 19,000-dollar gift to a young trust exceeds that safe harbor. Drafters address this with “hanging powers,” which let the excess withdrawal right carry over and lapse in later years as the trust grows, or by limiting the annual gift per beneficiary. A trust drafted without these provisions creates gift tax consequences for the beneficiaries that nobody intended.

Beneficiaries with no real stake. In Estate of Cristofani v. Commissioner, decided by the Tax Court in 1991, a grandmother gave withdrawal rights to grandchildren who were only contingent remainder beneficiaries, and the court allowed the exclusions. The IRS accepted the result reluctantly and has said it will challenge arrangements where withdrawal powers are handed to people with no meaningful interest in the trust simply to multiply exclusions. Naming every relative as a Crummey powerholder is an invitation to audit.

Income tax. A Crummey trust is often drafted as a grantor trust, so the grandparent pays the income tax, which is itself an additional tax-free transfer to the grandchild. If it is not, the trust pays tax at compressed trust brackets, and income distributed to a minor is subject to the kiddie tax, which for 2026 taxes a child’s unearned income above 2,700 dollars at the parents’ rate. Lapsed withdrawal rights can also make the beneficiary the tax owner of part of the trust under Section 678. How the trust is taxed should be decided deliberately, not discovered later.

The paperwork. Notices, proof of delivery, and acknowledgments must be kept for the life of the trust, which for a grandchild’s trust may be seventy years. The failure mode is not a bad decision but a lost binder.

How Does a Crummey Trust Compare to the Alternatives?

Custodial account (UTMA). Free to set up, no notices, and the annual exclusion applies automatically. But the child takes control at 21 in all three states, the account counts heavily against college financial aid, and there is no creditor protection. Best for modest sums.

529 college savings plan. Section 529 treats a contribution as a completed gift of a present interest with no notices required, and it lets the giver elect to spread a contribution of up to five years’ worth of exclusions, 95,000 dollars in 2026, over five years. Growth is tax-free if used for qualified education. The account owner keeps control and can change the beneficiary. The limits are that the money is meant for education, with penalties on non-qualified use, and a 529 cannot hold a family business interest, real estate, or life insurance.

Section 2503(c) minor’s trust. The Code itself provides a trust that qualifies for the annual exclusion without withdrawal rights, so long as the trustee may spend income and principal for the child before 21 and whatever remains passes to the child at 21, or to the child’s estate if the child dies earlier. It avoids Crummey letters but reproduces the UTMA problem: the money must be available at 21, though many such trusts give the child a brief window at 21 to demand the funds and otherwise continue.

Crummey trust. The most flexible and the most demanding. It holds any asset, lasts as long as the grantor wishes, can protect against creditors, and can be built for multiple grandchildren. In exchange it needs annual notices, usually annual gift tax returns, and competent drafting on the five-and-five and GST issues. The same withdrawal-power design is also what makes an irrevocable life insurance trust work, which we cover in our article on how an irrevocable life insurance trust avoids estate tax.

Does State Estate Tax Change the Analysis?

Annual-exclusion gifts remove assets from the estate for state as well as federal purposes, and that matters more in New York and Connecticut than the federal exemption suggests. New York’s estate tax exemption is 7,350,000 dollars for deaths in 2026, with a “cliff” that phases out the exemption entirely for estates about five percent above it, and New York adds back taxable gifts made within three years of death. Connecticut’s estate and gift tax exemption is 15 million dollars for 2026, matched to the federal amount, and Connecticut is the only state with its own gift tax. New Jersey repealed its estate tax for deaths after 2017 and has no gift tax, but its inheritance tax still reaches transfers to anyone other than a spouse, descendant, or parent. For a New York grandparent with an estate near the exemption, a program of annual gifts to a Crummey trust is one of the few tools that reduces state estate tax without complexity.

Plan Well. Live Better.

A Crummey trust is a simple idea with an unforgiving set of rules around it. Done right, it lets a family move meaningful wealth to the next generation, or the one after, on the family’s terms. At Milvidskiy Law Group, we design and administer trusts for children and grandchildren, including the annual notices and gift tax filings that keep them working. Learn more about our estate planning services.

This article is for general informational purposes only and does not constitute legal or tax advice. Reading it does not create an attorney-client relationship. Gift, estate, and generation-skipping transfer tax rules depend on individual facts and change frequently. Figures cited are for 2026 and were verified in September 2026 against the Internal Revenue Code, IRS guidance, and New Jersey, New York, and Connecticut sources; they should be confirmed before relying on them.