Wednesday, September 9, 2015

Crummey Indeed; Providing Proper Crummey Notices to Beneficiaries of an ILIT is Essential to Preserve Tax Benefits.


A highly regarded estate tax-savings tool utilized in estate planning is the Irrevocable Life Insurance Trust, commonly referred to as an “ILIT”.

Establishing an ILIT allows proceeds from a life insurance policy to escape estate taxes upon the death of the insured.  Under the current income tax laws, proceeds from a life insurance policy are paid to the beneficiaries of the insurance policy entirely income tax free.  For estate tax purposes, however, if you are the owner of a life insurance policy, the proceeds from that policy are included in your taxable estate on your death, and therefore become subject to the estate tax.  For example, if you are single with estate assets (other than life insurance) valued at $5,000,000, and if the proceeds of a life insurance policy payable on your death amount to $2 million, the estate tax due is approximately $628,000.

With an ILIT, on the other hand, the $2 million policy is removed from your taxable estate because the policy is owned by the trust. Thus, in the above example, placing the policy in a properly drafted ILIT would completely eliminate any estate tax on your death, while freeing up the entire $2 million for your heirs.  In combination with the favorable income tax laws, an ILIT can ensure that the proceeds from a life insurance policy escape both income and estate taxes. Additionally, contributions to an ILIT in the form of premium payments can also be made gift-tax free.

To enjoy those tax savings, it is imperative that you send the appropriate “Crummey” notice to the beneficiaries of your ILIT if required.  “Crummey” notices are required any time you make a gift to your ILIT.  In order to claim the gift tax annual exclusion (the amount that you are permitted to gift each year without incurring gift taxes) for gifts made to your ILIT, you must notify the ILIT beneficiaries of their right to withdraw such gift. Only by giving appropriate notice to these beneficiaries of their immediate right of withdrawal will you be able to claim the gift tax annual exclusion under the Internal Revenue Code.  Otherwise, you may incur gift tax liability.

To give appropriate notice, you can send a letter to the beneficiaries of your ILIT with the following information:

1.   A statement that a gift was made to the ILIT;
2.   Amount of gift that is subject to the particular beneficiary’s right of withdrawal;
3.   Amount of time the beneficiary has to exercise the withdrawal right before it lapses;  and
4.   A request that the beneficiary notify the trustee if he or she wishes to exercise the withdrawal right.

In addition, to keep adequate records, you may also want to send a separate receipt of acknowledgment. Each beneficiary can sign and give it back to you, stating that they received the required notice of their right to withdraw.  As previously mentioned, if these notices are not sent you may incur gift tax liability.

An ILIT is an excellent tool that can save you and your estate potentially hundreds of thousands of dollars in estate and gift taxes, if the proper formalities are strictly adhered to.  If you have questions about whether an ILIT is right for you or if you have been properly preparing the requisite Crummey notices, contact one of our attorneys at (702) 433-4455.

-Attorney Rebecca J. Haines


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