Over the past several decades trust agreements have become an increasingly popular addition to even a relatively modest estate plan. One reason for this is the varied and numerous goals that can be accomplished using a trust. If you plan to create an irrevocable trust agreement you may have been told that your agreement must include a “Crummey” power. Naturally, this lead to the question “ Why must my trust include a Crummey Power and what is a Crummey power? ”
An irrevocable trust is one that cannot be modified or terminated by the maker of the trust once the trust becomes effective. One popular type of irrevocable trust is an irrevocable life insurance trust, or ILIT. An ILIT works by creating an irrevocable trust and then transferring in, or purchasing, a life insurance policy wherein you are the insured. Upon your death, the proceeds of the life insurance policy are then paid out to the trust. The terms of the trust agreement then dictate how the proceeds are spent. Premiums for the life insurance policy during the time you are alive are paid by the trust. Understandably, it would be an additional benefit if the funds you gift to the trust for the payment of those premiums were also tax-free. Initially, these gifts to an ILIT were not eligible for the yearly gift tax exclusion because the gift must be one of “present interest” to be eligible for the tax-free treatment. By including a “Crummy power”, your gift becomes eligible for the yearly gift tax exclusion.
A “Crummey power” gives the trust beneficiaries the right to withdraw the funds gifted to the trust immediately after they are transferred in to the trust. The ability to withdraw the funds must last for at least 30 days. If the funds are not withdrawn they become part of the trust principle and, therefore, eligible to be used to pay the life insurance policy premiums. For the Crummey power to work as intended the beneficiaries must not actually exercise the right to withdraw the funds.
If you have additional questions or concerns about Crummey powers, an ILIT, or estate planning in general, contact the experienced New York estate planning attorneys at The Law Offices of Kobrick & Moccia, by calling 800-295-1917 to schedule your appointment.