“Demand trusts”, also known as “Crummey Trusts,” offer those who wish to start a gifting program for their children or grandchildren significant advantages over other traditional gifting tools such as UTMA/UGMA accounts and minor’s trusts. The advantages of the demand trust fall into the categories of asset protection and control over trust distributions. Depending on state law, a demand trust provides beneficiaries with asset protection for the duration of the trust. This requires careful drafting to navigate various state laws as well as complex income and estate tax rules.
With a demand trust, there is no requirement, as with UGMA/UTMA accounts and minor’s trusts, that beneficiaries receive the trust assets outright upon turning eighteen or twenty-one years of age. In fact, if desired by the grantor, the beneficiaries of the demand trust could never get complete control over the trust assets. In the demand trust, payment by the trustee of income or principal can be made discretionary.
Because the beneficiary does not have a right to the trust assets, except during the brief demand period, the trust assets are normally untouchable by creditors, including ex-spouses, as long as the assets are held in the trust. A demand trust, because of its flexibility, gives parents and grandparents greater control over their gifts than outright gifts -- whether to minor children/grandchildren (UGMA/UTMA accounts) or adult children and grandchildren.
Donors, through powers vested in the trustee or instructions within the trust, can control the timing of distributions to combat fears of the donee’s immaturity, inexperience, or lack of respect towards money. Any concern that a substantial gift can “de-motivate” an heir can also be addressed through proper instructions drafted into the trust agreement. The document can include instructions for specific uses of trust assets, e.g. a college education for the beneficiary.
The demand trust also solves a serious tax issue for those individuals whoes estates will be subject to an estate tax upon their death. If the custodian of an UGMA/UTMA account, or trustee of a minor’s trust, has a legal obligation to support the minor (for example - a parent), then the custodian has a general power of appointment over the account for the benefit of the minor. Therefore, the entire amount of the account is taxable in the custodian’s gross estate if he or she dies before complete distribution of the account or trust. Likewise, if the custodian or minor’s trust trustee is also the donor, the property is taxable in the donor’s gross estate if he or she dies before complete distribution of the account or trust.
When a grandparent wants the minor’s parents to be the trustees, the demand trust must be drafted very carefully in order to keep these gifts to grandchildren out of the parents' estates.
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