In the United States a Crummey trust (named for the first person to use such a structure) is a trust for the benefit of a minor into which gifts are made in a manner qualifying them for exclusion from the unified gift and estate tax.
Normally, gifts to minors are subject to parental / guardian control until the age of majority. In order to delay the transfer of control beyond the age of 18, the funds must be placed in trust. However, the annual gift exclusion ($13,000 per individual and $26,000 per married couple as of 2011) from the gift tax is only available for gifts of so-called current interests. Normally, a gift into a trust that comes under control of the beneficiary at a future date does not constitute a current interest.
A Crummey trust achieves the desired treatment by offering the recipient a window of time (often 30 days) to take immediate control of the gift. (The control offered only applies to the current gift--by assumption, an amount no greater than the annual exclusion amount--not the entire trust.) If the recipient fails to do so during that window, the gift becomes part of the trust, and is subject to the trust's distribution conditions. However, since the recipient had the opportunity to receive the funds outside of the trust, the gift is deemed to be a current interest, subjecting it to the annual exclusion.
The expectation of future annual gifts under the same mechanism (or the expectation of the withholding of such future gifts if the recipient exerts control over the gift) may motivate the recipient to relinquish control of the funds into the trust.
Use in life insurance trusts
In addition, similar provisions are often added to life insurance trusts or "ILITs" in order to maintain the annual gift tax exclusion by funding the ILIT using Crummey powers. This way additional gifts and beneficiaries can be taken advantage of to fund the life insurance trust. If executed properly the beneficiaries will receive the proceeds of the life insurance trust free of income or estate taxes.
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