Non-Crummey Insurance Trusts Can Make Sense

Estate Planner Sept-Oct 1997

The greatest benefit of any irrevocable life insurance trust (ILIT) is the removal of insurance proceeds from your taxable estate. Crummey ILITs have the added advantage of enabling gifts that fund premium payments to qualify for the annual gift tax exclusion ($10,000 per donee, $20,000 if spouses split a gift). Many people choose Crummey ILITs for this reason, overlooking possible drawbacks. Sometimes, in fact, non-Crummey ILITs makes sense, even if you incur some gift tax.

Crummey ILIT Drawbacks

The requirements to obtain the annual exclusion through gifts to a Crummey ILIT raise several potential drawbacks:

  • The ILIT must grant limited withdrawal (Crummey) rights to beneficiaries, and the trustee must notify the beneficiaries of all gifts made to the trust and their Crummey rights, which can be an administrative burden.
  • The Internal Revenue Service (IRS) has been challenging the use of Crummey rights to gain the annual exclusion, raising uncertainty about its continued availability to protect gifts to trusts.
  • Annual exclusion gifts to the same individuals for other, perhaps more effective, purposes are not possible.

Non-Crummey ILIT Advantages

When you want the benefits of a trust vehicle, such as asset protection, but either want to use your annual exclusion for other purposes or don’t want the uncertainties or administrative burdens of a Crummey ILIT, using a non-Crummey ILIT may make sense.

Each gift to the non-Crummey ILIT will use a part of your $600,000 exemption equivalent or even result in gift taxes, but these ILITs still offer many advantages:

Generally, the total premiums paid are significantly less than the proceeds payable at death, so you still can make significantly leveraged gifts.

  • Using your exemption equivalent today can allow you to pass on more real value tax-free than using it tomorrow in inflated dollars.
  • Even if your gifts to the trust exceed the exemption equivalent, paying gift tax can actually be beneficial because it generally is less expensive than estate tax. Gift tax is only paid on the amount of the transfer itself, while estate tax is paid on the amount of the transfer plus the amount of the tax.

Paying Gift Tax May Make Sense

Removing insurance proceeds from your estate is an integral part of any estate plan, so don’t overlook the total benefit, even if some tax cost is involved.