Mr. Crummey: A Legend in Gift and Estate Tax

I have previously written about the $15,000 annual exclusion, and Irrevocable Life Insurance Trusts (“ILIT’S”). ILIT’S are created primarily to own life insurance and remove the death benefit from the insured’s taxable estate. To achieve the desired estate tax benefit, premiums must be paid by the Trustee on behalf of the ILIT as the policy owner. For example, assuming Dad is the owner, when Dad writes a check for the premium, the check is written to the Trustee, not directly to the insurance carrier. When Dad pays the premium to the Trustee, this premium payment constitutes a gift to the ILIT beneficiaries, typically the surviving spouse and children. Now it gets complicated: In order to use Dad’s annual exclusion ($15,000 each per Trust beneficiary), the gift must be a “present interest.” If the payments are made to the ILIT, however, in which the beneficiaries do not receive benefits until Dad dies, the transfer is not a present interest. Thanks to Mr. Crummey (yes, that is his name), the taxpayer who came up with this plan, Dad can send out a “Crummey” letter converting the premium payment into a present interest by giving the beneficiaries (or guardians if minor children) the right to withdraw the premium payments. Consider this example: Dad’s premium is $30,000. He sends a check to his brother Bill, who serves as the Trustee. Bill deposits the $30,000 in Dad’s Irrevocable Life Insurance Trust Account. Upon receipt of the funds, Bill sends a letter to Dad’s two adult children, telling them “as beneficiaries you have 30 days to withdraw your share of the funds deposited in Trust, which equals $15,000.” After 30 days passes and the children have not withdrawn the premium payment, Bill sends an ILIT check for the premium payment to Large Insurance Company. The end result is Dad uses his $15,000 annual exclusion for the premium payment, without any gift tax consequence, and the ILIT protects the death benefit for Mom if she survives Dad, and ultimately the children estate and gift tax free.