IRREVOCABLE LIFE INSURANCE TRUSTS

OVERVIEW
Many people are under the mistaken impression that life insurance is not subject to estate taxes. This is incorrect. Life insurance is included in the estate of the owner of the policy regardless of who the beneficiaries of the policy are. However, if the policy is owned and held by an irrevocable trust the value of the policy will not be included in the estate.

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WHAT IS A "CRUMMEY POWER"?
Making an irrevocable trust the owner of the life insurance policy is only half the solution. The creator of the trust still needs to pay the premiums. In doing so, the creator makes 'gifts' to the trust. If the terms of the trust require that these 'gifts' be used for the payment of premiums, then the IRS will not consider them gifts qualifying for the annual ten thousand dollars per person gift tax exclusion.

The solution is to structure the trust so that the beneficiaries are not technically required to pay the premiums. So long as the beneficiaries have the option to keep the money for themselves and not pay the premiums, the IRS will consider the creator's payments to the trust a true gift. And, the creator of the trust won't be considered an owner of the policy.

It sounds more complicated than it is... Simply put, the "CRUMMEY POWER" is nothing more than a way for you to own a life insurance policy without actually owning it.

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FROM WHERE DID THE NAME "CRUMMEY" COME?
The name for this power within the trust came from the case of Crummey v. Commissioner, a 1968 case against the IRS in which this technique for paying for the premiums for life insurance with gift tax exempt funds was recognized by the courts.

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DOES THE TRUST IMMEDIATELY PROTECT THE LIFE INSURANCE PROCEEDS FROM ESTATE TAXES?
If the creator of the trust places an already existing policy into the trust there is a three year waiting period before the policy is protected from estate taxes. For this reason, it is important to visit with your attorney BEFORE purchasing life insurance in your own name. Ideally, you want the trust itself to take out the policy; this way, the life insurance proceeds will be protecting immediately from estate taxes.

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If you would like more detailed information about Irrevocable Life Insurance Trusts, please contact the firm. That attorneys at Hargrove & Rea, P.C. will be happy to answer any questions you may have.