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Posted in Legal Law

Estate Planning: Irrevocable Life Insurance Trust Isn’t That Cruel

The tax loophole referred to 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 satisfied and in 1968, they took Crummey to court for what they called an illegal tax loophole. Crummey’s victory in court set a precedent by making 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 pay the premium through donations to the trust. In 2013 and 2014, you can make gift payments of up to $ 14,000 to the trust per beneficiary. Thereafter, the trust makes 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 “Letter Crummey” 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.

Basically, the objective is that the beneficiaries do not withdraw the money to make the donation the property of the trust. If beneficiaries choose not to withdraw the money, a portion of the money will be used to pay their life insurance premiums. Any money left over remains in the Irrevocable Life Insurance Trust (ILIT) and is given to the beneficiaries when you die.

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 named beneficiaries in the Living Trust to fully understand the importance of not exercising their right or power to withdraw donated money in the ILIT.

APPOINT A TRUSTEE WHO UNDERSTANDS DUTIES

Appointing a trustee is an important choice. Before selecting a trustee, ensure that 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 will 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, there are legal remedies available if a trustee fails to fulfill the functions required by the trust.

CANCELLATION OF LIFE INSURANCE POLICY

The right is reserved to cancel the life insurance policy that is in the Life Insurance Trust. You can cancel the policy by stopping donating to the Life Insurance Trust and allowing the policy to expire. Any cash value that has accumulated in the whole life insurance policy, if any, 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 gets 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 opinions of my law firm and is not sponsored or endorsed by them. The information in the article is based on opinions only, 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 updated and entries may be out of date at the time you view them.

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