Estate Planning: Irrevocable Life Insurance Trust Isn’t So Crummey


The tax loophole referred to as “Crummey strength” is named after Clifford Crummey who produced a trust in order to move his assets with the intention of avoiding estate and inheritance taxes upon his decline. The Internal Revenue Service was not pleased and in 1968, took Crummey to court for what they termed as an illegal tax loophole. Crummey’s victory in court produced a precedent making the trust an permissible tool in estate planning.


Life Insurance Trusts have benefits while you are alive by allowing you to make premium payments by gifts to the trust. In 2013 and 2014, you can make up to $14,000 gift payments to the trust per beneficiary. Thereafter, the trust makes the payments for the life insurance policy or policies.


In order to avoid gift tax, a check for under $14,000 is written to the Life Insurance Trust for each beneficiary as a “gift.” In order to be in compliance with tax code and receive the gift-tax break, each beneficiary must have the right or strength to withdraw the gift money.

Thereafter, the trustee creates a “Crummey Letter” which is sent to each of the beneficiaries informing them they have the option to withdraw the money within 30 days. basically, the strength provided in the Crummey Letter grants the beneficiary the strength to receive the money and as a consequence, the beneficiary received the gift.

Essentially, the objective is for the beneficiaries to not withdraw the money in order to make the gift the character of the trust. If the beneficiaries choose not to withdraw the money, a portion of the money will be used to pay the life insurance premiums. Any money left over remains in the Irrevocable Life Insurance Trust (ILIT) and is given to the beneficiaries upon your decline.

At all times, it is imperative to continue a sufficient amount of money in the ILIT to cover the life insurance premiums. Keep in mind that the settlor must be certain that each of the trust’s beneficiaries will take no action upon receipt of the Crummey Letter by withdrawing any money gifted within the 30-day time frame. Any misunderstandings should be addressed with the client emphasizing the importance of the beneficiaries named in the Living Trust to fully understand the significance of not exercising their right or strength to withdraw the money gifted in the ILIT.


Designating a trustee is an important choice. Before selecting a trustee, ensure the trustee understands his or her responsibilities by emphasizing the necessity to notify the beneficiaries with the Crummey Letter each time a gift is made to the trust. Also, press the importance of making the life insurance payments. To ensure the trustee remains objective, the ILIT may have a provision granting the trustee the strength to dictate the exact amount each beneficiary is to receive.

If for some reason the trustee fails to perform his or her duties, you nevertheless have the option to request that a estimate appoint another trustee. Also, legal recourse is obtainable if a trustee fails to perform the duties required by the trust.


You save the right to cancel the life insurance policy held within the Life Insurance Trust. You may cancel the policy by no longer making gifts to the Life Insurance Trust and allow the policy to lapse. in any case cash value has been built up in the whole life insurance policy, if any, may be converted to a term life policy.

consequently, the creation of ILIT for your estate plan is complicate and should be handled by an attorney to ensure the maximum assistance of an ILIT is achieved by the insured.


This article only reflects my personal views in my individual capacity. It does not necessarily represent the views of my law firm, and is not sponsored or endorsed by them. The information contained in the article is based solely on opinion, and is provided only for educational purposes and is not intended to provide specific legal advice. No representation is made about the accuracy of the information posted in the article. Articles may or may not be updated and entries may be out-of-date at the time you view them

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