Irrevocable Life Insurance Trusts may alleviate heavy tax burdens on your estate. Are you aware your life insurance policy may bring a heavy tax burden along with it? Many individuals and families are unaware of how their life insurance policies may affect their estate plans, especially those with significant wealth. But fear not, there’s a solution that might just alleviate this stress: Irrevocable Life Insurance Trusts (ILITs) and Crummey Letters.

Let’s break it down into simpler terms.

What’s an Irrevocable Life Insurance Trust (ILIT)?

An Irrevocable Life Insurance Trust (ILIT) is a tool used in estate planning specifically designed to own life insurance policies. By placing your life insurance policy within an ILIT, its value isn’t counted as part of your estate when you pass away. This can be a game-changer for those worried about estate taxes.

Two key points to remember:

  1. It’s Irrevocable: Once you set up the ILIT and transfer your policy into it, you lose control over it. Similar to an Irrevocable Trust. This ensures the policy stays out of your estate.
  2. You Can’t Be the Trustee: You can’t manage the trust yourself if you want it to work effectively. But don’t worry, a spouse or adult child can step in as trustee.

Who Benefits from the Trust?

You’ll typically name the ILIT as the primary beneficiary of the life insurance policy. After you pass away, the proceeds from the policy go into the trust for the benefit of its beneficiaries.

ILITs and Crummey Letters: Simplified

Now, let’s talk about Crummey Letters, which might sound complicated but are essential for making ILITs work smoothly.

Every month or year, you need to pay premiums for your life insurance policy. Since the ILIT owns the policy, it’s responsible for these payments. But when you contribute funds to cover these premiums, the beneficiaries of the trust are technically receiving a “gift.”

To ensure this gift qualifies as tax-free and falls within the $15,000 gift tax exclusion, beneficiaries must have a “present interest” in it. This is where the Crummey Letter comes in.

What’s a Crummey Letter?

It’s a letter sent to the beneficiaries of the ILIT, informing them that a gift has been made to the trust. It gives them the immediate right to withdraw these assets within a certain time frame, usually around 30 days. If they don’t withdraw, the contribution is used to pay the policy premium.

This letter essentially turns what would be a future gift into a present one, making it eligible for the gift tax exclusion.

Final Thoughts

While beneficiaries technically can withdraw the funds, it’s in everyone’s best interest for them not to. Otherwise, it could jeopardize the policy’s premiums, leading to lapses.

And remember, beneficiaries must be informed of this right each time a contribution is made to the ILIT to qualify for the gift tax exclusion.

If all of this still seems overwhelming, don’t worry. We are here to help navigate the estate planning journey through each chapter of your life. Reach out to us, and let’s work together to secure your future.

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Disclaimer: This article is intended to serve as a general summary of the issues outlined therein. While this article may include general guidance, it is not intended as, nor is a substitute for, qualified legal advice. Your review or receipt of this article by Lexern Law Offices, Ltd. (the “LLG”) or any of its attorneys does not create an attorney-client relationship between you and the LLG. The opinions expressed in this article are those of the authors of the article and does not reflect the opinion of the LLG.