Annual
Exclusion Gifts & Crummey Powers
In 2011, any
individual is allowed to gift up to $13,000 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 $13,000 to each of them every year
without incurring a gift tax. The
children’s Mom can also gift $13,000 to each child. Each child would receive a total of $26,000
from their parents. The parents’ annual
exclusion gift total for the year would be $78,000. 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 $39,000 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 $5,000,000 valid during 2011
& 2012.
If Dad were
to make the same $39,000 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.
