Irrevocable Life Insurance Trusts & Crummey Trusts
In addition to minimizing estate taxes, effective and proactive estate planning accomplishes two often-overlooked objectives. First, the plan should provide liquidity to the estate in order to pay estate taxes or debts and fully fund trusts, such as credit shelter and marital trusts. Second, proactive planning should effectively utilize the annual and lifetime gifting exclusions to transfer ownership of assets expected to appreciate significantly during the client’s lifetime.
Irrevocable Life Insurance Trusts and Crummey Trusts are important tools in accomplishing these objectives.
- An Irrevocable Life Insurance Trust (ILIT) is an insurance trust that owns insurance on an individual’s life, removing the insurance proceeds from the insured’s estate for estate tax purposes, saving potentially significant amounts of estate tax. For example, where spouses have a combined estate exceeding the federal and state estate tax exclusions, placing $1,000,000 of life insurance into an insurance trust may save $500,000 or more in estate taxes.
- Despite its unfortunate name (the name comes from the party who successfully fought the IRS), the Crummey Trust is an excellent device for estate planning. This irrevocable trust allows the donor to make gifts to the trust and qualify them for the annual exclusion from gift taxes. Upon receipt of a gift, the trustee must give the trust beneficiaries notice of the gift and the opportunity to withdraw from the trust and receive his or her share of the gift. Assuming the beneficiary does not exercise this withdrawal right, ownership of the gift will stay with the Crummey Trust until the trustee distributes it, which may be at certain ages or upon a beneficiary’s death.