An irrevocable life insurance trust (“ILIT”) lets you reduce or even eliminate estate taxes, so more of your estate can go to your loved ones. It also allows for more control over your insurance policies and the money that is paid from them. The insurance trust owns your insurance policies for you. Since you do not personally own the insurance, it will not be included in your estate for estate tax or probate purposes, thereby reducing your estate taxes and probate costs and delays. It is also helpful in the case of an unmarried couple, or couples where one or both are non-US citizens.
The insured person under the policy should never pay a premium directly on either a new or existing trust policy. All premiums should be paid by the trustee from a trust owned bank account. The insured usually makes sufficient cash gifts to the trust to allow the trustee to pay the premiums. The gifts should go in the trust checking account, and the trustee should write and sign a trust check for the premium payment. The insured must make the gifts early enough to allow the trustee to send out the (usually) 30 day “Crummey” notices. The trust must have the cash resources available to meet the rights of withdrawal of the beneficiaries, even if they are unlikely to exercise the right. If the insurance policy has enough accessible cash value, or if other trust assets in sufficient amounts are available, then the early timing of the grantor’s gift is not necessary.
There is no question that the best practice for the trustee of an ILIT is to open a new checking account owned by the trustee and under the new EIN obtained for the ILIT when the trust was created. If you created the ILIT with Handler & Levine, LLC, an EIN was provided at the time the trust was signed.
Hopefully before you got the notice, the grantor of the ILIT deposited in the ILIT checking account the funds to pay the premium. If that did not happen this year, make a note to get it done in advance next year. Notify the grantor of the trust, who is also the insured of the trust, that the premium is due. The grantor will then deposit funds from his/her individual account as opposed to a joint account, particularly if the other account holder is a beneficiary of the ILIT (such as a spouse).
Now you send out the Crummey notice to the individuals who are beneficiaries of the trust.
The Crummey notices are used when money is put into a life insurance trust. The Crummey notice goes to the beneficiaries of the life insurance trust, unless there is a provision in the ILIT that allows notice to go to a third person, or a particular beneficiary has been exempted by the donor from the notice.
Very basically, a Crummey notice says, “A gift has been made to a trust of which you are the beneficiary and you have the right to take out some percentage of the gift for the next 30 days.” In doing this the notice should include, at least, (i) the amount subject to the withdrawal right, (ii) the expiration date for the withdrawal right, and (iii) the manner in which the withdrawal right may be exercised.
If the time for the beneficiary to withdraw the money has expired without the beneficiary exercising his or her right, you will then pay the premium from the funds in the trust account.
Yes, as the trustee you are entitled to engage an attorney to represent you in any facet of this process.
Well, you can, but usually should not. Whoever named you as the beneficiary and his or her attorney will likely explain to you that it is in your best interest to leave the money in the trust. The money will be used to make life insurance premium payments of which you are probably a beneficiary.
When the method of making gifts to trusts qualify for the annual exclusion by including a special withdrawal power in the trust, the IRS was not happy. They challenged the practice in a case titled D. Clifford Crummey & Ethel Elizabeth Crummey v. Commissioner. The IRS asked the Tax Court to disallow the practice, but instead the Tax Court approved it. As a result, trusts incorporating this withdrawal power are known as “Crummey Trusts” and the withdrawal powers are called “Crummey Powers.” Not surprisingly, the notices called for in the trusts were called “Crummey Notices.”
For more information, see our detailed report on the best practices in the use of an Irrevocable Life Insurance Trust.