If you have concerns about the size of your estate from a tax perspective, you may want to consider using a Crummey trust to hold your insurance policy. When properly created, this type of trust can be an excellent estate planning tool. It is crucial, however, to fully understand this type of trust before moving forward. Since this trust is irrevocable, it is permanent.
7 Considerations Before Creating a Crummey Trust
What factors should be considered before creating a Crummey trust? The following is an overview:
- Once you make the trust the beneficiary of the life insurance policy, you cannot change it. Only the trustee will have the ability to change the beneficiary.
- You will not be able to borrow against the value of the policy. This is because doing so would cause the IRS to treat you as the owner of the policy for tax purposes, negating the tax benefits of the Crummey trust.
- Typically, you will need to obtain a new insurance policy in order to make the plan work effectively. If you transfer an existing policy into the trust, you must live for another three years after the transfer in order to retain the tax benefits of the estate plan.
- The trust must be fully irrevocable. Generally, irrevocable means permanent. In other words, once you set up the trust and put the policy in its name, you cannot get it back.
- If the premium payments are expensive and exceed the amount of the annual gift tax exemption, you may be treated as having made taxable gifts each time you provide the trust with funds to pay the premiums.
- In order to be effective from an estate tax perspective, the Crummey trust must meet certain requirements, and the trustee has ongoing responsibilities that must be fulfilled.
- Trustees of Crummey trusts must be chosen carefully because the responsibilities are numerous and complex. Some people do not have a loved one or friend that they trust to serve in this role. As a result, it may be necessary to pay a third party to do this job. You cannot serve as the trustee of your own trust.
Determining the right tools to incorporate into your estate plan requires the guidance of a knowledgeable legal professional. We can help you create the estate plan that is right for your goals and needs. We encourage you to check out the client testimonials from our many previous clients to learn more about how we can help.