President Obama’s $2.9 trillion budget for the 2015 fiscal year includes several tax increases, particularly on the wealthy, to pay for increased spending without increasing the deficit. One increase that will not be widely reported pertains to "Crummey" power limitations. (I am limiting the discussion to the Crummey withdrawal issue although this proposal affects potentially other gifts.)
What is a "Crummey" power? Some background is necessary. In addition to the $5,340,000 exemption that each individual has to protect from gift or estate tax, there is annual exclusion which can be utilized to make present interest gifts in the amount of $14,000. A "present interest gift" is not a gift to an Irrevocable Trust where the beneficiary is not entitled to assets until the donor’s death. Such gifts to Irrevocable Trusts that own life insurance are common, where the Trustee will use the cash contribution to pay the premium to the insurance company. The Crummey power is necessary to make the cash gift to the Trust a present interest.
How? The Crummey power allows the beneficiary to withdraw the amount of the cash gift up to the annual exclusion, thus converting it from a future interest to a present interest. Assuming the beneficiary does not exercise that withdrawal right, the cash gift is then available to pay the premium.
Now, back to the President’s proposal. In lieu of the Crummey withdrawal right, the donor could give $50,000 to an Irrevocable Insurance Trust and it would qualify for the annual exclusion without a Crummey withdrawal right. This greatly simplifies matters in that premiums of $50,000 or less automatically would qualify for the annual exclusion without the "Crummey" process. On the other hand, if there were more than four beneficiaries - for example, if there were 10 beneficiaries, no longer could the annual exclusion gift be utilized to protect $140,000. In this example, the gift qualifying for the annual exclusion would be capped at $50,000.
Note, this only applies to gifts to Irrevocable Trusts. It does not affect present interest gifts directly to an unlimited number of beneficiaries, which would still qualify for the $14,000 exemption.
Read more discussion of estate planning topics affecting Virginia residents and U.S. citizens at Dedon on Estate Planning.
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