Advanced Underwriting Consultants

Question of the Day – May 16

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My client is going to create an irrevocable life insurance trust (ILIT) to own insurance on her life.  Must the trust have Crummey provisions?

Answer:  Crummey provisions are not necessary for an ILIT to be effective for estate tax purposes.  However, they are most commonly used when the trust’s grantor wants to be able to make annual exclusion gifts to the trust.

The gift tax rules allow a donor to make gifts of up to $14,000 per year to a donee in 2013.  Such gifts, referred to as annual exclusion gifts, do not even require the filing of a gift tax return.

In order for a gift to qualify to the annual exclusion, the IRS has ruled that it must be a gift of a present interest.  A gift of a future interest does not qualify for the annual exclusion.  If a donor makes a gift of a future interest, she must file a gift tax return and use up part of her lifetime exemption ($5.25 million in 2013) to offset the taxable value of the gift.  Any exemption used up during lifetime is not available to offset the taxable estate at death.

When a donor makes a gift into an irrevocable trust, she is making gifts to the beneficiaries of that trust.  If the beneficiaries don’t have immediate access to the money, the IRS has ruled that such gifts are gifts of future interests.

On the other hand, if the trust says that the beneficiaries have the right to withdraw gifts made to the trust, the gifts are considered to be gifts of a present interest—and thus they qualify for the annual exclusion.  The power of a beneficiary to ask the trustee for the beneficiary’s share of a trust contribution is referred to as a Crummey power—named for the court case in which that kind of trust provision was tested and approved.

The IRS has come up with other various specific requirements for Crummey powers to be effective for gift tax purposes.  When placing new insurance to be owned by a Crummey-style ILIT, the financial professional should be in active communication with the client’s attorney to make sure all required steps are followed properly.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.