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 estate 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 past that makes 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 of up to $14,000 to the trust per beneficiary. Subsequently, the trust makes the payments of the life insurance policy or policies.
HOW CRUMMEY POWER WORKS
To avoid gift tax, a check for less than $14,000 is written to Life Insurance Trust for each beneficiary as a “gift.” To comply with the tax code and receive the gift tax exemption, each beneficiary must have the right or power to withdraw the gift money.
Thereafter, the trustee creates a “shredded letter” which is sent to each of the beneficiaries informing them that they have the option to withdraw 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 not retired 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 life insurance premiums. Any money left over remains in the Irrevocable Life Insurance Trust (ILIT) and is given to the beneficiaries upon your death.
At all times, it is imperative to keep a sufficient amount of money in ILIT to cover life insurance premiums. Please note that the settlor must be sure that each of the beneficiaries of the trust will take no 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 that the beneficiaries named in the Living Trust fully understand the meaning of not exercising their right or power to withdraw the money donated in the ILIT.
APPOINTING A TRUSTEE WHO UNDERSTANDS HIS DUTIES
The appointment of a trustee is an important election. Before selecting a trustee, make sure the trustee understands the trustee’s 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, ILIT may have a provision that gives the trustee the power to dictate the exact amount each beneficiary should receive.
If for some reason the trustee fails to fulfill his or her duties, you still have the option to request that a judge appoint another trustee. Additionally, legal recourse is available if a trustee fails to perform the duties required by the trust.
CANCELLATION OF THE 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 been built up in the whole life insurance policy, if applicable, can be converted to a term life policy.
Therefore, creating ILIT for your estate plan is complex and should be handled by an attorney to ensure the insured gets the maximum benefit from an ILIT.
FULL DISCLOSURE
This article only reflects my individual personal views. It does not necessarily represent the views of my law firm and is not sponsored or endorsed by them. The information contained 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 by the time you view them