Annual
Exclusion Gifts & Crummey Powers
Any individual is allowed to
gift up to $12,000 per year to any person without incurring a gift tax. This is known as the annual exclusion
amount. For instance, if Dad has 3
children, he can gift $12,000 to each of them every year without incurring a
gift tax. The children’s Mom can also
gift $12,000 to each child. Each child
would receive a total of $24,000 from their parents. The parents’ annual exclusion gift total for
the year would be $72,000. This is true
even if the entire gift comes from only one parent as long as Dad and Mom agree
to “split” the annual exclusion gifts.
The only restriction on annual
exclusion gifts is that the child/recipient must be allowed the right of
immediate use and enjoyment of the gift.
If the child cannot enjoy or use the gift immediately, it will be
considered a gift of future interest and will not qualify for the annual
exclusion. Because of this
restriction, one might think that a gift into an irrevocable trust would not
qualify for the annual exclusion. However, it is possible to qualify gifts into
a trust for the annual exclusion by using what is known as a “Crummey”
power.
The use of Crummey powers
allows a parent to make gifts to an irrevocable trust that can qualify for the
tax free annual exclusion. A Crummey
power gives the trust beneficiaries the right to immediately withdraw
their share of the gift from the trust.
This power generally lasts for 30 days from the date of the
gift. If the beneficiary does not
withdraw the gift during the 30 day period, the gift remains in the trust and
is available for use as the trustee directs.
This is the most common method to fund an irrevocable insurance trust.
Let’s look at an
example. Dad decides he needs to
purchase a $2,000,000 insurance policy on his life to cover estate taxes. If he were to buy and own the policy, the
policy proceeds would be included in his taxable estate and subject to estate
taxes. On the other hand, if he were to
gift the $33,000 premium to an irrevocable trust that had no Crummey powers,
he would have made a taxable gift and could owe a gift tax. Dad’s other option, if available, would be to
apply this gift to his Lifetime Gift Exemption of $1,000,000.
If Dad were to make the same
$33,000 gift per year to a trust that included Crummey powers,
the trustee would notify each beneficiary/child that they have a 30 day right
to withdraw their 1/3rd share of the gift. The children understand that if they do not
withdraw the gift, the money will be used to pay the premium on the $2,000,000
life insurance policy that they will ultimately inherit from the trust.
The end result…..a
$2,000,000 life insurance policy is owned outside of Dad’s taxable estate. He made tax free annual gifts to the trust
for the premium payments without incurring any gift taxes.
