Know Your Duties If You Are Administering a Crummey Trust

When creating an estate plan, your loved one may have crafted an irrevocable trust in order to minimize estate taxes and prevent beneficiaries from having access to the trust assets until a specified period of time. These trusts are sometimes referred to as Crummey trusts or irrevocable life insurance trusts when the asset funding the trust is a life insurance policy.

The creator of the trust makes annual gifts to the trust that are tax free because they are less than or equal to the annual gift tax exemption amount. By giving the beneficiaries of the trust a temporary right to withdraw these annual gifts, the gifts are deemed “completed” for tax purposes and, therefore, are not subject to gift tax. It is crucial for trustees to understand the complicated nature of these trusts as well as the many responsibilities for handling them.

6 Responsibilities of Trustees of Irrevocable Crummey Trusts

What are some of the responsibilities of trustees of Crummey trusts? The following is an overview:

  1. Make payments of life insurance premiums. The trustee is in charge of managing the ongoing payment of the premiums on the policy. The trustee receives the notices when a premium is due.
  2. Determine the trust’s options if there is insufficient cash to pay the premium that is due. This is done by reviewing the terms of the trust as well as the policy information. In some cases, it may be feasible to borrow against the cash value of the policy.
  3. Provide the beneficiaries of the trust with Crummey notices. When the trustee receives the gift that is typically used to pay the insurance premium, the trustee must promptly notify the beneficiaries of the receipt of the gift, their right to withdraw the gift, and the time in which they have to make the withdrawal. Normally, beneficiaries have between 15-30 days to make a withdrawal.
  4. Review the terms of the life insurance policy on a regular basis. This is important because the trustee is responsible for ensuring that the policy is performing as it was designed. The trustee may also need to prepare for scheduled increases in premiums.
  5. Determine whether the insurance policy is a prudent investment on a regular basis. Many trustees choose to involve a professional financial advisor in order to make these decisions. The trustee remains responsible, however, for monitoring the investment on an ongoing basis.
  6. File all necessary tax reporting documents. For example, the trustee may need to file federal and state income tax returns and issue K-1s for beneficiaries. The rules surrounding tax reporting and irrevocable trusts are extremely complicated. It is crucial to seek guidance from an experienced attorney as well as a tax advisor when carrying out this responsibility.

Fulfilling the duties of a trustee of an irrevocable trust is not always an easy task. Fortunately, you do not have to navigate this process alone. We are here to help. We encourage you to check out the client testimonials from our many previous clients to learn more.