AALU: Crummey Powers Instrumental in Funding Irrevocable Life Insurance Trusts

Crummey Powers – Crummy or Essential? It’s More Than Just Moving Paper

Crummey powers are instrumental in funding irrevocable life insurance trusts (“ILITs”) with annual exclusion gifts.

Annual exclusion gifts can help clients substantially fund ILITs while preserving their lifetime gift and estate tax exemption amounts. Qualifying a gift in trust as an annual exclusion gift to the ILIT beneficiaries, however, requires careful planning with regard to the selection of Crummey powerholders, the crafting of Crummey power provisions, and the administration of the notice and withdrawal provisions.

Crummey Notices often seem to be forgotten or simply viewed as the completion of standard forms. Despite recent favorable Tax Court decisions, however, the IRS continues to closely scrutinize ILIT contributions and their qualifications as annual exclusion gifts, emphasizing the importance of following best practices when implementing and administering ILIT Crummey powers. Accordingly, the proper administration of these notices can mean the difference between transferring property to an ILIT with only the use of recurring annual exclusion amounts versus paying gift taxes and/or losing lifetime gift/estate and GST tax exemptions due to the contributions.

Get the complete primer on the Transfer for Value Rule in the latest Washington Report.