Crummey Trusts

Everybody knows we should do this, but nobody does. For an insurance policy to be free of wealth and income taxes, it must be placed within an irrevocable life insurance trust, known as ILIT. If the IRS conducts an audit, and the named beneficiaries haven’t sent, signed, and returned seedy letters (every year), they could undo the trust and return it to the estate for estate tax purposes. The policy would still be free of income tax, but the face value of the policy is now included in equity.

The crummey trust is the power of appointment granted to the trust. A separate account is established for the trust. Each person writes a check from this trust for the other’s insurance premium, or if they use an outside trust service to provide the premium and seedy letters on their behalf. You cannot have any ownership incidence (you or your spouse) on the insurance policy; the trust is called the beneficiary (not the estate). The Crummey trust allows additions to the trust, under the exclusion of gift tax, up to the number of named beneficiaries. Each year, a letter must be sent to each beneficiary granting them the right to withdraw cash from the trust. If one person withdraws the cash, the withdrawal can undo the trust.

Crummey letter sample: (to each beneficiary)

SAMPLE “CRUMMEY” NOTICE LETTER

Dated:

Dear Trust Beneficiary:

Please note that a donation was made to the Irrevocable Trust ____________________ on ___________ day of _____________, 19_____. As the beneficiary of the trust, pursuant to the provisions of Article III, you have the present right to demand from the trust its prorated share of the gift, in the amount of $ _________. If you wish to exercise your right of withdrawal, please do so in writing, addressed to the undersigned, within 30 days after receiving this letter. If you do not wish to exercise your right of withdrawal within this period of time, your right of withdrawal will expire.

If you do not wish to withdraw from this trust, please sign and date the waiver below and return it to me.

Waiver of Retirement of the Beneficiary I acknowledge receipt of the notification of withdrawal for the Irrevocable Trust ________________ and I hereby irrevocably waive said right of withdrawal as of the date indicated below.

_____________ __________________________

Trust beneficiary

* This sample document has been prepared for illustrative purposes and is not intended to be legal advice. The actual document that must be executed by the recipient must be drawn up by the recipient’s own attorney.