Indiana Irrevocable Life Insurance Trust - Beneficiaries Have Crummey Right of Withdrawal
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FAQ
Crummey power allows a person to receive a gift that is not eligible for a gift-tax exclusion and then effectively transform the status of that gift into one that is eligible for a gift-tax exclusion. For Crummey power to work, individuals must stipulate that the gift is part of the trust when it is drafted.
Irrevocable Trusts Generally, a trustee is the only person allowed to withdraw money from an irrevocable trust. But just as we mentioned earlier, the trustee must follow the rules of the legal document and can only take out income or principal when it's in the best interest of the trust.
The right of withdrawal is limited in duration and scope usually available for 30 days after you have made the annual payment to the trust. Even though this option is carefully crafted into an ILIT, the intention is that the beneficiaries of the ILIT will not actually exercise the power to make a withdrawal.
An ILIT provides a number of advantages beyond the ability to provide a tax-free death benefit. This includes protecting your insurance benefits from divorce, creditors and legal action against you and your beneficiaries. An ILIT also avoids probate and shields assets from expense and loss of privacy during probate.
Advantages of a Crummey TrustYou do not have to provide an opportunity for the beneficiary to withdraw the entire balance of the trust until a certain age. A Crummey trust can have multiple beneficiaries. Unlike some college savings plans, there are no penalties if the funds are not used for higher education.
Crummey powers give the beneficiary a limited time (often 30, 45 or 60 days) to withdraw contributions to a trust at will, converting the future interest gift to a present interest gift. This withdrawal right is generally limited to an amount equal to the current annual gift tax exclusion.
A withdrawal right is the right, given to the beneficiary of a trust, to withdraw all or a portion of each gift made to the trust. For example, if a $1,000 gift is made to a trust and a beneficiary of the trust has a withdrawal right over that gift, he or she can withdraw up to $1,000 from the trust.
A special type of irrevocable life insurance trust, called a Crummey trust (aka irrevocable gift trust), allows a wealthy grantor to fund the trust in such a way that payments are treated as gifts of present interest to the trust's beneficiaries, thereby qualifying for the annual gift exclusion, then using the payments
The beneficiaries of the trust will not have to pay income taxes on the life insurance proceeds that they ultimately receive.
Crummey power is a technique that enables a person to receive a gift that is not eligible for a gift-tax exclusion and change it into a gift that is, in fact, eligible. Individuals often apply Crummey power to contributions in an irrevocable trust.