Annual Exclusion Gifts & Crummey Powers

 

In 2010, 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 “Crummeypower. 

 

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 $1,000,000.

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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