A previous Post (February 11, 2008) was about using an Irrevocable Trust to remove insurance proceeds from the taxable estate of both a husband and wife even though one or both are the insured's. Because the Irrevocable Trust owns the insurance, and the clients (i.e., the husband and wife in this case) give up control over the policy, the insurance proceeds are not included in their estate. Yet, the surviving spouse and children can still be beneficiaries of the Trust and indirectly the proceeds.
Besides the estate tax advantages of removing the insurance proceeds from the taxable estate, there are also gift tax issues when the premiums are paid. Because the Trust owns the policy, the Trustee must pay the premiums out of funds in a Trust bank account. Thus, the Trustee is receiving the premium payments from the clients. (Note, the Trustee is not typically the clients, but an independent trustee such as a bank or family member.)
The gift issue arises because the clients, when paying the premium to the Trustee, are making gifts to the beneficiaries of the Trust, typically their children. However, the gifts, because they are to a Trust, are not "present interest gifts." Because the gifts are not present interests, the gifts don’t qualify for the annual exclusion, which is currently $12,000 per recipient. As described in the February 11, 2008 Post, that is the purpose of the "Crummey" letter. Without a Crummey letter to qualify the gifts as present interests, the clients are depleting their exemption amount each time a premium is paid.
This "Crummey" procedure is often misunderstood or simply ignored. Therefore, set forth below are step-by-step instructions necessary for compliance. These instructions are written to the Trustee, since the Trustee as the fiduciary owning the policy must send out the Crummey letter.
- Since you as Trustee are the owner and beneficiary of the insurance in the Trust, all insurance premiums or other correspondence should be mailed to you at your address.
- Presumably you were issued an IRS employer identification number (EIN) when the Trust was executed.
- You should go to a bank of your choice and open a non-interest bearing fiduciary checking account in the name of the Trust. The account should be in your name as Trustee of the Trust.
- After the account is opened, the grantor of the Trust should write a personal check for the premium amount, payable to the Trustee as a gift to the Trust. You should keep all records related to this account. This should be done 30 days before the premium due date.
- The checking account should be non-interest bearing to avoid income tax and a tax return. Of course, tax reporting for the Trust will commence after the Grantor’s demise and income is generated from the insurance funds received by the Trust.
- As soon as you deposit the check, you send out the "Crummey letters."
- You should retain all canceled checks and receipted withdrawal letters permanently in the Trust folder.
- After 30 days from the mailing of the Crummey letter, you as Trustee pay the premium to the carrier.