By Carl Peterson, Managing Principal, Life Insurance Solutions
Here is a problem I see over and over with irrevocable life insurance trusts (also known as an “ILIT”): the Crummey letters do not go out.
The trust gets drafted. The policy gets placed. Every year the family makes an annual exclusion gift to the trust so the trustee can pay the premium. And somewhere along the way, nobody sends the letter that is supposed to go with each gift. It is an easy thing to miss because nothing happens when you skip it. No alarm goes off. The premium gets paid and life goes on.
What a Crummey letter is
When you make an annual exclusion gift to an ILIT, the general expectation is that the trust’s beneficiaries have a limited right to withdraw the amount contributed on their behalf. That withdrawal right is what generally allows the gift to be treated as a present interest gift, which is what the annual exclusion is designed to cover. A Crummey letter is the written notice the trustee sends to each beneficiary saying a gift has been made and that they have a set period of time to exercise that right. The name comes from a court case, Crummey v. Commissioner.
How it typically works
You make a contribution to the trust. The trustee sends a letter to each beneficiary with withdrawal rights, letting them know about the gift and the deadline to withdraw it. The deadline passes, usually 30 to 60 days depending on how the trust document is written. Beneficiaries have the right to withdraw the funds during that window, though in practice they typically do not, and the trustee uses the funds to pay the premium once the window closes. The paper trail is what matters. It is the evidence that the withdrawal right was real and was communicated.
Why it matters
If the letters are not sent, or are not documented, the gift may not be respected by the IRS as qualifying for the annual exclusion, and there can be real consequences. How it plays out for any specific trust depends on the trust document and the facts, which is exactly why your attorney needs to weigh in. And because ILITs are meant to last decades, a gap in the record can sit quietly for years before it surfaces at an audit or at the worst possible time.
What to Do About It
Not sending Crummey letters, or not documenting them properly, can end up being a real problem, one that is often invisible until it is not. We strongly urge families with an ILIT to reach out to their trust and estate counsel or family office to put a structure in place that assures Crummey letters are sent and documented appropriately every year.
Insurance and estate planning involve legal and tax considerations. Lindberg & Ripple does not provide legal or tax advice. Consult your attorney and tax advisor about your specific situation.
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