By William H. Byrnes, Esq., Robert Bloink, Esq., LL.M.
(A quick note: For those not already in the know, “Crummey” refers to a tax court case. The “powers” granted as a result of the ruling allows a person to effectively transfer meaningful amounts of one’s assets downstream to the next generations without causing you to pay gift taxes on those transfers. If not done correctly, it can be very costly. TK)
You give your clients clear instructions about handling their life insurance trusts, but what happens when they disregard your instructions and get themselves into an intractable tax mess by personally paying premiums directly to the carrier? Direct payment of premiums on a policy in an ILIT can net your clients a big gift tax bill. Is there anything you can do to soften the blow and get them back on track?
The Tax Court recently considered a case, Estate of Turner v. Commissioner, where an insured did just that—paying some premiums directly to the carrier against orders—and correctly gifting some premiums to the trust. Turner’s estate believed that the premium payments made directly to the carrier were present interest gifts qualifying for the $10,000 annual gift tax exclusion ($13,000 in 2011). The IRS disagreed, claiming that the direct payments were gifts of future interest that were subject to the gift tax and ineligible for exclusion.