The tax loophole referred to as “Crummey Power” was named after Clifford Crummey who created the trust to transfer his assets with the aim of avoiding estate and inheritance taxes upon his death. The Internal Revenue Service was displeased 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 trust an acceptable tool in inheritance planning.
WHAT ARE THE BENEFITS OF LIFE INSURANCE TRUST?
Life Insurance Trust benefit as long as you live by allowing you to make premium payments through gifts to trusts. In 2013 and 2014, you can make gift payments of up to $14,000 to the trust per beneficiary. After that, the trust makes payments for the policy or life insurance policy.
HOW CRUMMEY POWER WORKS
To avoid gift taxes, checks under $14,000 are written to the Life Insurance Trust for each recipient as a “gift.” To comply with the tax code and receive gift tax relief, each recipient must have the right or power to withdraw the prize money.
After that, the guardian made “Ugly Letter” which is sent to each recipient notifying them that they have the option to withdraw the money within 30 days. In essence, the power of attorney granted in the Crummey Letter authorizes the recipient to receive the money and as a result, the recipient receives the gift.
Basically, the goal is for the beneficiary not attractive money to make the gift the property of the trust. If the beneficiary chooses not to withdraw the money, part of the money will be used to pay the life insurance premium. The remaining money remains in the Irrevocable Life Insurance Trust (ILIT) and is given to the beneficiary after you die.
At all times, it is very important to maintain a sufficient amount of money in ILIT to cover life insurance premiums. Keep in mind that the settler must be sure that the respective beneficiary of the trust will not take action upon receipt of the Crummey Letter by withdrawing the money provided within a 30 day period. Any misunderstandings should be addressed with the client emphasizing the importance of the named beneficiaries in the Living Trust to fully understand the importance of not exercising their right or power to withdraw the money awarded in the ILIT.
ESTABLISHING A TRUSTEE THAT UNDERSTANDS THE TASK
Appointing a guardian is an important choice. Before choosing a trustee, make sure the trustee understands his responsibilities by emphasizing the need to notify beneficiaries with a Crummey Letter each time a gift is awarded to the trust. Also, emphasize the importance of making life insurance payments. To ensure the trustee remains objective, the ILIT may have provisions that give the trustee the power to determine the exact amount each beneficiary will receive.
If for some reason the guardian fails to carry out his duties, you still have the option of asking the judge to appoint another trustee. Also, legal recourse is available if the trustee fails to perform the duties requested by the trustee.
CANCELLING THE LIFE INSURANCE POLICY
You have the right to cancel the life insurance policy that is in the Life Insurance Trust. You can cancel the policy by no longer giving gifts to the Life Insurance Trust and allowing the policy to expire. Any amount of cash that has been accumulated in all life insurance policies, if any, can be converted into a term life insurance policy.
Therefore, creating an ILIT for your real estate plan is complex and must be handled by an attorney to ensure the maximum benefit from ILIT is achieved by the insured.
FULL DISCLOSURE
This article only reflects my personal views in my personal capacity. It does not necessarily represent the views of my law firm, and is not sponsored or endorsed by them. The information contained in this 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 posted in the article. Articles may or may not be updated and entries may be out of date by the time you view them