The tax loophole known as “Crummey Power” is named after Clifford Crummey, who created a trust to transfer his assets with the intention of avoiding inheritance and inheritance taxes upon his death. The Internal Revenue Service was not happy and in 1968 took Crummey to court for what they called an illegal tax loophole. Crummey’s victory in court created a precedent that made the trust an acceptable tool in estate planning.
WHAT ARE THE BENEFITS OF A LIFE INSURANCE TRUST?
Life insurance trusts have benefits while you are alive by allowing you to make premium payments through gifts to the trust. In 2013 and 2014, you can make gift payments to the trust of up to $ 14,000 per beneficiary. Subsequently, the trust makes the payments for the life insurance policy or policies.
HOW THE CRUMMEY POWER WORKS
To avoid gift tax, a check for less than $ 14,000 is written to the Life Insurance Trust for each beneficiary as a “gift.” To comply with the tax code and receive exemption from gift tax, each beneficiary must have the right or the power to withdraw the money from the gift.
Thereafter, the trustee creates a “Miserable letter” which is sent to each of the beneficiaries informing them that they have the option of withdrawing the money within 30 days. In essence, the power of attorney provided in the Crummey Letter gives the beneficiary the power to receive the money and, as a result, the beneficiary received the gift.
Essentially, the objective is that the beneficiaries do not withdraw the money for the donation to become the property of the trust. If beneficiaries choose not to withdraw the money, a portion of the money will be used to pay for life insurance premiums. Any money left over remains in the Irrevocable Life Insurance Trust (ILIT) and is given to beneficiaries upon death.
At all times, it is imperative to keep a sufficient amount of money in the ILIT to cover life insurance premiums. Note that the settlor must be sure that each of the trust beneficiaries will not take any action upon receipt of the Crummey Letter by withdrawing the donated money within the 30-day period. Any misunderstandings should be addressed with the client emphasizing the importance of the beneficiaries named in the Living Trust fully understanding the meaning of not exercising their right or power to withdraw the money gifted in the ILIT.
APPOINTMENT OF A TRUSTEE WHO UNDERSTANDS YOUR DUTIES
Appointing a trustee is an important choice. Before selecting a trustee, make sure the trustee understands their responsibilities by emphasizing the need to notify beneficiaries with the Crummey Letter each time a gift is made to the trust. Also, emphasize the importance of making life insurance payments. To ensure that the trustee remains objective, the ILIT may have a provision that gives the trustee the power to dictate the exact amount that each beneficiary should receive.
If for any reason the trustee fails to fulfill his or her duties, you still have the option of requesting that a judge appoint another trustee. Additionally, legal recourse is available if a trustee fails to fulfill the duties required by the trust.
CANCELLATION OF LIFE INSURANCE POLICY
You reserve the right to cancel the life insurance policy held within the Life Insurance Trust. You can cancel the policy by stopping making donations to the Life Insurance Trust and allowing the policy to lapse. Whatever cash value has accumulated in the whole life insurance policy, if applicable, it can be converted to a term life policy.
Therefore, creating an ILIT for your estate plan is complex and must be handled by an attorney to ensure that the insured achieves the maximum benefit from an ILIT.
THE FULL DISCLOSURE
This article only reflects my personal views on an individual basis. It does not necessarily represent the views of my law firm and is not sponsored or endorsed by them. The information in the article is based on opinion only and is provided for educational purposes only and is not intended to provide specific legal advice. No representation is made about the accuracy of the information published in the article. Articles may or may not be up to date and entries may be out of date at the time you view them
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