Clients have asked about the recent Tax Court memorandum decision, Estate of Turner v. Commissioner, T.C. Memo. 2011-209, where the Court held that contributions to an irrevocable trust to pay life insurance premiums qualified for the annual exclusion even though the taxpayer paid the premium directly to the insurance company and the beneficiaries never received notice of the premium payment. (The primary issue in Turner centered on a family partnership created for estate planning purposes, but that is the subject of another post.)
The Crummey withdrawal right, annual exclusion gifts and the payment of insurance premiums to an Irrevocable Life Insurance Trust, is irrelevant to many. But for those who have irrevocable trusts to hold life insurance so that the death benefit is not in their estates, the Crummey withdrawal right is extremely important.
The Crummey withdrawal right, named after a taxpayer in a 1968 case, stands for the proposition that the payment of an insurance premium for a policy owned by an irrevocable trust qualifies for the annual exclusion only if it is a "present interest." A present interest means an immediate right to withdraw the contributed premium. But when the premium is paid to a Trust, there typically is no immediate right. The Crummey withdrawal right gives the beneficiary the right to take out his or her share of the insurance premium. For example, if the premium paid to the Trust is $10,000, and the Trust has two beneficiaries, the trust would have explicit language giving each beneficiary the right to withdraw $5,000. If the beneficiaries waived the withdrawal right (as expected), the Trustee then pays the insurance company the premium.
Traditionally, the taxpayer had to make the premium payment to the Trustee and the beneficiaries needed to be aware of the right to withdraw the premium. The rationale being, how else could there be a right to withdraw the money if funds were not in the Trust and the beneficiaries did not even know about it?
This background takes us to the Turner case. The Court stated that the taxpayer could pay the insurance company directly and the beneficiary did not need to know about the withdrawal right. Under Turner, the law was satisfied because the Trust had language allowing for the right to withdraw the payments. If the Turner case was the law, it would avoid the huge inconvenience that taxpayers face in complying with the Crummey right each year. Turner may also rescue many taxpayers who are supposed to comply with the Crummey right but do not.
But does Turner provide that relief? On one hand, it is a Tax Court decision. However, it is a memorandum decision issued by the Tax Court, not a Tax Court opinion, and there is a difference in precedential value. Further, it is unlikely the IRS would acquiesce in Turner. So until there is an acquiescence or the decision is affirmed by one or more Circuit Courts, taxpayers would be well advised to stay the course and continue to put up with the inconvenience of the Crummey letter and payment to the Trustee. My guess is the IRS will continue to litigate this issue.