A Crummey trust can be used as an income shifting strategy where your child does not gain control of the assets until after age 21. In a typical defective trust, a periodic contribution of assets to the trust is accompanied by an immediate withdrawal power (defective power) that gives your child the right to withdraw the contribution for a limited time. If your child does not exercise the withdrawal power, the assets will remain in the trust for an additional specified period of time.
Specific Details
The parents shifted $5,000 of income to their child by using a defective trust as an income shifting strategy where your child does not gain control of the assets until after age 21. Since the parents income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%). Since the childs taxable income was taxed at the 0% tax bracket, there may be no tax on the income. Therefore, because of the income shifting, the total family tax savings may be $1,500.
Potential Savings
If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by using a defective trust as an income shifting strategy where your child does not gain control of the assets until after age 21.