Estate Planning: Irrevocable Life Insurance Trust Isn’t So Crummey


The tax loophole named "Crummey Power" gets its name from Clifford Crummey who created a trust to transfer his assets in order to avoid taxes on estates and estates upon his disappearance. The Internal Revenue Service was not happy and, in 1968, Crummey was sued for what they described as an illegal tax loophole. Crummey's victory in court set a precedent that made trust an acceptable tool in estate planning.


Life insurance trusts enjoy benefits while you are alive by allowing you to pay bonuses in the form of donations to the trust. In 2013 and 2014, you can make up to $ 14,000 in grant payments to the trust per beneficiary. Thereafter, the trust makes payments for the life insurance policy (s).


In order to avoid tax on donations, a check of less than $ 14,000 is written to the life insurance trust for each beneficiary as a "gift". In order to comply with the tax code and benefit from the gift tax reduction, each beneficiary must have the right or authority to withdraw donations money.

Thereafter, the trustee creates a "Crummey letter" which is sent to each of the recipients to inform them that they have the opportunity to withdraw the money within 30 days. Essentially, the power in the Crummey letter gives the recipient the power to receive money. As a result, the recipient has received the gift.

The objective is essentially that the beneficiaries do not remove the money for the gift to be the property of the trust. If the beneficiaries choose not to withdraw the money, some of the money will be used to pay the premiums for life insurance. Any remaining money remains in the Irrevocable Life Insurance Fund (ILIT) and is returned to the beneficiaries upon your death.

At all times, it is imperative that the ILIT keep an amount sufficient to cover life insurance premiums. Keep in mind that the settlor must be certain that each beneficiary of the trust will not take any action after receiving the Crummey letter by withdrawing any amount paid within 30 days. In the event of a misunderstanding, the client must stress the importance of the named beneficiaries in Living Trust to understand the importance of not exercising their right or power to withdraw the money paid into ILIT.


Appointing a trustee is an important choice. Before choosing a trustee, make sure that he understands his responsibilities by emphasizing the need to inform beneficiaries with the Crummey letter whenever a donation is made to the trust. In addition, emphasize the importance of making life insurance payments. For the trustee to remain objective, the ILIT may provide for a power to dictate the exact amount that each beneficiary must receive.

If, for any reason, the trustee fails to perform his duties, you still have the opportunity to ask a judge to appoint another trustee. In addition, a legal remedy is available if a trustee fails to perform the duties required by the trust.


You reserve the right to terminate the life insurance contract held with the life insurance trust. You can cancel the policy by no longer donating to the life insurance trust and letting the policy expire. Regardless of the cash value accumulated throughout the life insurance policy, it may eventually be converted into a term life insurance policy.

As a result, the creation of ILIT for your estate plan is complex and must be assigned to a lawyer to ensure the insured's maximum benefit from an ILIT.


This article reflects only my personal opinions in a personal capacity. It does not necessarily represent the point of view of my law firm and is not sponsored or endorsed by them. The information contained in the article is based solely on opinions, is provided solely for educational purposes 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.


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