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The use of insurance trusts is an important estate planning tool, especially with some of the tax advantages that apply to the use of insurance policies owned by trusts. If you haven’t heard about Crummey trusts, then you should have. Despite the name, these trusts offer invaluable means to remove substantial assets from your taxable estate, especially in conjunction with a life insurance trust, including those with split dollar or group term insurance. In certain instances we have recommended life insurance trusts as part of overall estate planning.
Questions you should be asking:
- What is a Crummey Trust and why is it so useful to many estate plans?
- What is an Irrevocable Life Insurance Trust?
- What, if any, rights do I retain when I establish a life insurance trust?
- Can I transfer an existing policy to the life insurance trust?
- Must the life insurance trust be irrevocable?
- May I serve as trustee of the life insurance trust?
- What is a Testamentary Trust?
The attorneys at Cullen and Dykman can answer these questions and more.
A case in point:
Regardless of the lifetime exemption from federal gift tax, the federal tax code currently permits each person to make an annual gift of up to $13,000.00 to anyone he or she chooses without triggering the gift tax, with no limit on the number of persons to whom such a gift is made. In the case of married couples, the total amount of the gift qualifying for this annual exclusion from gift tax can be $26,000 per recipient, on the theory that the gift is “split” between the two, even though only one made the gift, and a total of $26,000.00 per recipient per year is tax free. This unique feature of gifting, along with the fact that unlike the estate tax, the amount of the gift tax is disregarded in computing the size of a taxable gift, renders the use of inter vivos gifting in conjunction with life insurance trusts a very valuable tool that must be considered by all persons contemplating a taxable estate. The one thing that must be kept in mind is that the annual exclusion gift must be a gift of a present interest in the money. Therefore, a gift to a trust for the benefit of a child will not qualify for the annual exclusion, unless the child has some present interest in the gift. In other words, the child must be able to claim the gift and take it as his or her own. If that right is limited in time, the law will still qualify the transfer for the annual exclusion, thus opening the way for tremendous estate planning techniques. This is called a “Crummey” power because of the name of the case that introduced the concept. Although the so-called “Crummey Trust” is not required to own a life insurance policy, when it does the annual gifts can be used to fund the premiums and render the entire proceeds of the policy free of gift and estate taxation, provided the beneficiary, even a minor, is give a “present interest” in the annual exclusion amount given to the trustee. This is usually accomplished by notifying the beneficiary of the gift and allowing that beneficiary a reasonable time to decide if he or she prefers the money be paid directly to the beneficiary.
For example, a grandmother established a trust under which her two adult children were the vested beneficiaries and her five minor grandchildren were contingent beneficiaries of the remainder, their interests vesting only if the grandchild's parent predeceased the grandmother or failed to survive the grandmother by more than 120 days. Using as her basis the existence of these seven contingent beneficiaries, the grandmother claimed the right to make $91,000.00 ($13,000.00 x 7) in annual gifts to the trust all under the protection of her seven annual exclusion gifts. However, the IRS objected by virtue of the contingent nature of the gifts to the grandchildren, having to survive their parents if they were ever going to take the proceeds of the trust. The tax court agreed with the grandmother, thus enabling her to deplete her taxable estate to the tune of $91,000.00 per year.
Such tools described above are on the outer limits of advanced estate planning with the use of life insurance, and should be undertaken only under the advice of experienced counsel.
- Michael Ryan Speaks at Seminar for Estate Planning Council of Long Island on Radical Changes in the Uniform Trust CodeFebruary 12, 2014