To follow in [Reverend Crummey’s] footsteps, set up a trust and have it buy a life insurance policy on your life. Someday when you die, the trust will receive the insurance proceeds and pay them out to the beneficiaries listed in your trust.
When you’re looking to pass on significant assets, a trust is a powerful tool. Quality is important. While a “crummy” trust won’t cut it, a “Crummey” trust just might do the trick. Poor puns like this and more abound in a recent Forbes article about “Crummey trusts” I thought you might enjoy.
A “Crummey trust” – so named for the case of Crummey v. Commissioner and the good Reverend Crummey himself – is a way of legally avoiding estate taxes while passing on wealth to heirs by combining an irrevocable trust and a life insurance policy. To create a Crummey Trust, you first create the trust and then have it buy a life insurance policy on your life. In the end, when you pass away, the beneficiaries of the trust inherit the proceeds from the life insurance policy without that money ever “coming in contact” with your taxable estate.
This strategy isn’t without its challenges, however. One challenge is the risk of incurring gift taxes. However, as long as annual premiums are below the gift tax threshold of $13,000 per person (and you don’t gift them anything else during the year in excess of that amount in combined gifts) you can stay in the clear.
The biggest problem usually tends to lie in the practice of sending out annual letters – “Crummey letters’ – since the beneficiaries must be notified within very specific windows during which they may elect to withdraw the gifted funds. Failure on the part of the trustee to send out the letters can raise questions with the IRS and may upset the apple cart, so to speak, when seeking to qualify the annual gifts as falling within the annual gift exclusion. For this reason, many families find the safest approach is to engage a professional trustee to handle these notice letters and other administrative duties to ensure compliance.
Reference: Forbes (October 9, 2011) “With Trusts, ‘Crummey’ Is Good”
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