Introduction to Irrevocable Life Insurance Trusts (ILITs) - Part 2
One of the themes running through the estate and gift tax laws is control.
Can I give money to charity but retain control of it?Can I get a marital deduction for a gift to my spouse at my death while still retaining control of how the money is used?
Can I give money to my children without gift tax consequences while still retaining control of those gifts?
I want to focus on this last goal, and how it works in an ILIT scenario.
There is an annual gift tax exclusion. This amount is currently $12,000, which means you could write a check for $12,000 to as many people as you wish and not owe any gift tax (or even need to file a gift tax return). This exclusion is found in ยง2503(b) of the Internal Revenue Code. You will note that the language of this section specifically excludes "gifts of future interests in property." In other words, if you set up a trust for your child and contributed $12,000 to that trust, this gift wouldn't qualify for the annual gift tax exclusion because it is a gift of a future interest (i.e. your child doesn't have immediate access to the gift).
Enter the concept of the "crummey trust" (named after a family that went to court with the IRS over this issue). A crummey trust is simply an ILIT or other irrevocable trust that contains provisions allowing a beneficiary to withdraw all or a portion of any contribution to the trust within a given time period after the contribution is made (maybe 60 days?). If the withdrawal right isn't exercised, then the right lapses (disappears).
Giving the beneficiary this withdrawal right means that the beneficiary has indeed received a present interest in the gifted property, so the gift tax annual exclusion may be used. And of course, the idea is that a beneficiary will never (upon penalty of future disinheritance) withdraw the contribution, meaning it will remain in the trust, to be used to pay life insurance premiums or otherwise invested.
Two other points:
1. Notice of a contribution (and the right to withdraw all or a portion of that contribution) should be given in writing every time a contribution is made.
2. The language of the crummey trust must be drafted with care in order to avoid a situation where the beneficiary who doesn't exercise his or her right of withdrawal is deemed to have made his or her own (possibly taxable) gift to the trust.
