A Crummey power is a written right, given to a trust beneficiary, to withdraw a gift the moment it lands in the trust — usually within about 30 days — and its only purpose is to convert a gift the beneficiary cannot touch today into a gift that qualifies for the annual gift tax exclusion. Almost nobody ever exercises the right. That is the point. The right has to exist and the beneficiary has to be told about it, because the tax rule requires a gift of a present interest, and a withdrawal right is what makes an otherwise future interest present.
The name comes from a real case: Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), in which the Ninth Circuit accepted the arrangement. It is now standard drafting in irrevocable life insurance trusts, and if a parent or grandparent set up an ILIT to hold a life insurance policy, the annual letter the trustee sends is called a Crummey notice.
This page leads with the figures, because the figures are where families get into trouble. Every dollar amount below is stamped with the year it was true, and every one of them changes. Confirm the current number with the IRS or your own CPA before you rely on it. Pine Lake Legacy provides education and a free policy review only, and does not give legal or tax advice.
In This Article
The Numbers That Define a Crummey Power
$19,000 per donee, per year (2025). The federal annual gift tax exclusion under Internal Revenue Code section 2503(b) was $19,000 per recipient for 2025. It is indexed for inflation and announced each fall in an IRS revenue procedure, so check the current year’s figure before writing a check. A married couple electing to split gifts can generally double it.
$5,000 or 5%. Internal Revenue Code section 2514(e) treats the lapse of a general power of appointment as a taxable transfer by the powerholder, except to the extent the lapsed amount does not exceed the greater of $5,000 or 5% of the trust assets subject to the power. That flat $5,000 is statutory and has not been indexed, which is exactly why the gap between it and a $19,000 exclusion gift creates the drafting problem described below.
Roughly 30 days. The withdrawal window is a matter of drafting, not statute. Thirty days is the market standard; 15 to 60 days is the ordinary range. The IRS has attacked windows so short that the beneficiary had no realistic chance to act.
Three years. If an existing life insurance policy is transferred into an irrevocable trust and the insured dies within three years, Internal Revenue Code section 2035 pulls the death benefit back into the taxable estate. New policies bought by the trustee avoid the issue entirely.
The estate tax exemption. It was $13.99 million per person in 2025, and legislation enacted in 2025 set a higher figure beginning in 2026 with future inflation indexing. This number has moved repeatedly and is scheduled to move again. Ask your CPA what it is on the day you are reading this rather than trusting any page, including this one.
Why the Withdrawal Right Exists at All
The annual exclusion applies only to a gift of a present interest — something the recipient can enjoy right now. Money handed to a trustee under instructions to hold it for twenty years is a future interest, and future-interest gifts get no exclusion. Without a fix, every premium payment funneled through an irrevocable trust would consume lifetime exemption and require gift tax reporting on Form 709.
The Crummey power is that fix. When the grandparent wires $19,000 to the trust, the trustee notifies each beneficiary that they may withdraw their share for the next 30 days. The right is genuine — a beneficiary who demands the money must receive it. Because the right is genuine, the gift is a present interest and the exclusion applies. When the window closes unexercised, the trustee pays the insurance premium as originally intended.
Everything downstream flows from the reality of the right. Courts and the IRS have rejected arrangements where the beneficiary was never told, where the trust had no liquid assets to satisfy a demand, or where there was a side understanding that no one would ever withdraw. A power that exists only on paper is the single most common way these trusts fail.
The 5-and-5 Gap and the Hanging Power Workaround
Here is the arithmetic problem. A beneficiary who lets a $19,000 withdrawal right lapse has, in tax terms, released a general power of appointment over $19,000. Section 2514(e) forgives that release only up to the greater of $5,000 or 5% of the trust corpus. On a trust holding, say, $200,000, 5% is $10,000 — so $9,000 of the lapse is treated as a gift by the beneficiary to the other trust beneficiaries.
Three standard responses appear in real trust documents:
- Cap the withdrawal right at the 5-and-5 amount, accepting a smaller annual exclusion per beneficiary and adding more beneficiaries to spread the gifts.
- Hanging powers — the excess right does not lapse in year one but carries forward and lapses in later years as the 5-and-5 room opens up.
- Make the beneficiary’s interest a vested or contingent remainder so that a lapse is an incomplete gift for tax purposes.
Which of these appears in your family’s trust is a document question, and reading it is a job for the attorney who drafted it or a new one who reviews it. Do not assume; the language differs materially between trusts drafted in the 1990s and those drafted after 2018.
| Figure | Amount | Year Stated | Where to Confirm |
|---|---|---|---|
| Annual gift tax exclusion per donee | $19,000 | 2025, indexed annually | IRS annual revenue procedure; your CPA |
| Five-and-five lapse safe harbor | Greater of $5,000 or 5% of corpus | Statutory, not indexed | IRC section 2514(e) |
| Typical withdrawal window | About 30 days | Drafting convention, 15-60 day range | Your trust instrument |
| Look-back on transferring an existing policy | 3 years | Statutory | IRC section 2035 |
| Gift tax return | Form 709 | Filed for the calendar year | IRS; your CPA |
The Paperwork That Proves It Happened
Three items make up the file the IRS would ask for, and families routinely have only one of them.
The trust instrument. It contains the withdrawal clause, the length of the window, whether the power hangs, and the trustee’s notice obligation. Find the article headed “Withdrawal Rights” or “Powers of Withdrawal.”
The annual Crummey notices. A dated letter to each beneficiary (or the parent or guardian of a minor beneficiary) stating the amount contributed, the beneficiary’s withdrawable share, and the deadline. Best practice is a signed acknowledgment returned to the trustee and kept permanently. If those letters were never sent, that is a real and fixable problem — start with what to do when Crummey notices were never sent.
Form 709. The federal gift tax return. Many families never file it because the gift fell under the exclusion, but filing can start the statute of limitations running on the valuation of the gift, and attorneys frequently recommend filing anyway. That call belongs to your CPA.
One more paperwork detail matters: the trust, not the insured, should be the owner and beneficiary on the policy’s declarations page. If the insured is still listed as owner, the trust is not doing the job it was created to do.
Terms It Is Confused With
Power of attorney. Completely different. A power of attorney lets an agent act for a living person who is unavailable or incapacitated; it ends at death and has nothing to do with gift tax. See how a durable power of attorney works if that is the document you are actually holding.
General power of appointment. The broader tax concept. A Crummey power is a narrow, temporary general power over one contribution. The connection is section 2514, which is why lapse rules apply at all.
Grantor trust status. A separate question about who pays income tax on the trust’s income. A Crummey power can create partial grantor-trust status in the beneficiary under Internal Revenue Code section 678, which surprises people. Ask your CPA whether your trust files its own return.
Beneficiary designation. The form at the insurance company saying who receives the death benefit. Related but distinct: your policy beneficiary designation should name the trust when an ILIT is in place, and it frequently still names a spouse by mistake.
What This Means for the Policy Inside the Trust
Now the practical part. A Crummey power is only machinery for funding premiums. The real asset is the policy, and policies that were bought in 1998 to solve a 1998 estate tax problem often no longer solve anything — the exemption is far higher now than it was then, the insured is much older, and the premium is much larger.
When that happens, the trustee — not the insured — holds the decision. A trustee with a fiduciary duty to beneficiaries can generally consider keeping the policy, reducing the face amount, exchanging it under Internal Revenue Code section 1035, surrendering it for cash value, or exploring whether the policy has a market value above its surrender value. Letting an ILIT-owned policy lapse without documenting the analysis is how trustees get sued.
If the trust’s beneficiaries and the insured agree the coverage is no longer needed, the trustee should get three numbers before doing anything: the current cash surrender value in writing from the carrier, an in-force illustration showing what premium keeps the policy to maturity, and an independent view of what the policy might fetch in the secondary market. Comparing all three is how you find out whether surrendering leaves money behind.
Pine Lake Legacy offers a free, no-obligation policy review for exactly that comparison — send the policy cover page or call (732) 978-9575. If the honest answer is keep it, you will hear that. Decisions about trust administration, gift tax, and estate tax should be made with your own elder law or estate attorney and your CPA.
Frequently Asked Questions
Does the beneficiary actually get to take the money?
Yes, and that is essential. The withdrawal right must be real and the trust must be able to honor a demand. Arrangements where beneficiaries were never notified, or where there was an understanding that nobody would ever withdraw, have been rejected. In practice almost no one withdraws, because doing so ends the premium payment the family intended.
What happens if the trustee never sent the Crummey notices?
The annual exclusion for those years may be at risk, which can mean unreported taxable gifts. It is a fixable problem more often than families fear, but it needs an attorney and a CPA looking at the actual contribution history. Gather every year’s contribution records and any letters that were sent before the first meeting.
How long does the beneficiary have to withdraw?
Whatever your trust document says. About 30 days is the standard drafting choice, with 15 to 60 days the ordinary range. There is no federal statute fixing the period, but windows short enough that a beneficiary could not realistically act have drawn IRS challenges. Check the withdrawal rights article of the trust.
Is a Crummey power the same as a power of attorney?
No, and the similar names cause real confusion. A Crummey power is a short-lived right of a trust beneficiary to withdraw a contribution, and it exists for gift tax reasons. A power of attorney authorizes an agent to act for a living person and ends at that person’s death. They serve unrelated purposes.
Do we still need the ILIT if the estate tax exemption went up?
Many families ask this, and it is the right question. The exemption was $13.99 million per person in 2025 and was raised again beginning in 2026, so trusts built for a much lower exemption may now be solving a problem that no longer exists. Whether to unwind one is a decision for your estate attorney, not a website.
Can the trustee sell a policy the trust no longer needs?
A trustee generally can consider keeping, reducing, exchanging, surrendering, or selling trust-owned coverage, subject to the trust instrument and state fiduciary law. The safest practice is to document all the options with real numbers, including the cash surrender value and any secondary-market value, before acting. Get the trust reviewed by counsel first.
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Related Reading
- Crummey Notices Missing
- What Is A Durable Power Of Attorney
- What Is A Beneficiary Designation
- What Is An Irrevocable Beneficiary
- What Is Cash Surrender Value
- What Is A Life Settlement
- How Much Is My Policy Worth
- What Is An In Force Illustration
Pine Lake Legacy does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.