Protecting Insurance with Crummey Trusts

Crummey trusts are named after a Methodist minister who beat the IRS in the 1960s. Individuals can use these trusts to protect life insurance policies from federal estate taxes. Even though Congress raised the ceiling for tax-free giving, advisers say these trusts are still beneficial because that ceiling could go up again.

A family can set up a Crummey trust to buy a life-insurance policy and then fund the premiums with annual gifts; this will transfer money out of the estate while avoiding the gift tax. The death benefit will go to the trust because the trust owns the policy, and this protects that benefit from federal estate taxes.

The only requirement is that the trustee has to send out “Crummey letters” annually to notify beneficiaries that they have the option to withdraw the gift from the trust within a certain period of time. The IRS will only recognize a gift as tax-free if the beneficiary of the gift has a right to take it in the short term.  

Since it can be easy to forget to send a Crummey letter, settlors may want to appoint an accountant or attorney to assure that letters are sent annually to avoid problems with the IRS. 

See Arden Dale, Crummey Trusts Still Smart, Say Advisers, The Wall Street Journal, Sept. 26, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.