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Help for the Trustee*:
8 Steps for Administering a "Life Insurance Trust"
Lisa
Nachmias Davis
Davis O'Sullivan & Priest LLC
59 Elm Street, Suite 540
New Haven, CT 06510
Phone: 203-776-4400 / Fax 203-774-1060
davis@sharinglaw.net
last updated 10/4/22
The procedures described below are used to administer "life
insurance trusts" or other trusts with withdrawal rights known as
"Crummey Powers." A "Crummey Power" means that the beneficiary has the
power to withdraw contributions for a set period of time after the
contributions are made (so that the contributor will be able to take
advantage of the annual exclusion from transfer taxes). A "life
insurance trust" that is designed so that the life insurance will not
be
subject to tax when you die typically has these kinds of "Crummey
Powers," usually called "powers of withdrawal." (The name "Crummey"
refers to a case and is not intended to describe how we feel about
these procedures!) Occasionally, only a spouse holds such a power, and
these instructions may not apply. If it doesn't have these
powers, or if you don't follow the rules, the proceeds still won't be
included in your estate when you die, but the value of the premiums
will be added back in; this may or may not matter depending on the
amount of the premiums and the size of your overall estate.
Your
attorney or accountant may handle this trust for you, usually for
$500 or so per year. If you (the Trustee) want to handle the trust
yourself, you should follow these procedures. If your attorney is
handling the trust for you, he or she may use slightly different
procedures, such as depositing contributions into, and
paying premiums out of, the attorney's "trustee account" or "client
funds account."
Tip: If you have a system for "reminders"
available with many programs such as Quicken, Outlook, etc., you may
want to program in the following dates: (a) date the premium is due
(usually the anniversary of the policy), (b) one month prior to that
date (to remind the contributor that the trust may need cash to pay the
premium) and (c) December 1st (to make sure you have sent out the
"Crummey notice").
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| 1. |
Federal Tax Identification
Number or "EIN": The trust should have its own tax
identification number ("EIN"). (This is my position; views differ,
however.) Your attorney or accountant can help you with this. If you
feel able to do so, you can apply
online at
www.irs.gov.
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| 2. |
Checking Account: You
should open a checking account in the name of the trust, with either or
both Trustees as signatory. Use the trust's tax identification number
for the account. The Trustee(s) must sign bank signature cards and
order a few checks. Pick a bank with no or a small minimum
balance requirement!
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| 3. |
Insurance Policies: Owner
and beneficiary designations should read:
________ AND _________ AND THEIR SUCCESSORS AS TRUSTEES
OF THE [NAME OF THE TRUST] U/A [DATE OF THE TRUST].
If
an existing policy is being transferred to the trust, its
owner/beneficiary must be CHANGED by completing forms obtained from the
insurance company (or your agent), AND by delivering
them to the insurance company. Certified mail is recommended, and you
should keep a copy. The Trustees should obtain WRITTEN
CONFIRMATION from the company as to the change. You
can also ask your insurance agent for help, but make sure you get the
confirmation.
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| 4. |
Billing Address: The
insurance premium notice should be billed and directed TO THE TRUSTEES.* If an existing
policy is being transferred to the trust, the billing address must be
CHANGED by completing what is often a SEPARATE form from the insurance
company, AND by delivering it to the company. If the bills
continue to go to the old address, check with the company. You may want
to ask your agent for help. *NOTE: Obviously, this
doesn't work with group term life insurance you may have through your
employer. The IRS has informally decided (for now) that this kind of
trust still "works" with a group term life policy.
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| 5. |
Contributions: Before
the premium is due, preferably at regular intervals, money should be
transferred to the Trustees, and deposited in the trust bank account. *NOTE: this doesnt't
apply to a group term life policy.
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| 6. |
Crummey Notices: Upon
receiving any deposit into the account, or no later than
December 1st of the year of the deposit, the Trustees must
send out the "Crummey Notice" to the individuals named in the trust as
having withdrawal powers. (If they are minor, the notice making the
payment should be sent to their custodial parent.) The purpose of the
notice is to avoid gift tax consequences for the contributing party.
Failure to issue the Crummey notices may have more, or less, negative
consequences, depending on the amounts of the contributions, the
donor's taxable estate, and other factors, so you will want to have
proof that the notices were sent, such as a certified mail receipt.
When in doubt, consult your advisor. *NOTE: What to do with
group term policies? A: If you can, find out what premium is
being paid for your policy, send out a notice early in the year that
the premium amounts are expected to be contributed, and follow up with
a reminder at the end of the year as well. You can also do this if you
are arranging to have contributions made by automatic transfer from
your account to the trust's account (if you want to continue monthly
premium payments). A sample letter follows these
instructions.
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| 7. |
Gift Tax Returns: If
contributions (including deposits into the trust account and the cash
value of transferred policies) exceed $16,000 (adjusted annually --
this is for 2022) times the number of persons having withdrawal powers
(or more if the contributor is married), federal and state gift tax
returns (IRS Form 709 and Form CT-709) may have to be filed by April
15th of the following year. If a policy with cash value has been
transferred, a gift tax return may be required together with IRS Form
712 completed by the insurance company, stating the "interpolated
terminal reserve" value, or gift tax value, of the policy. Consult
your tax advisor. And remember, contributions to a trust with a
"Crummey Power" will count towards the "annual exclusion" amount you
can give in any year -- $16,000 per donor / per donee (2022) (if
married, a total of $32,000 per donee probably).
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| 8. |
Income Tax Returns: If
the trust has income sufficient to require a tax return (such as
interest on an internal policy "account" that holds refunds, excess
premium payments, etc. - an ISA account) the grantor of the trust may
be required to pay the income tax, and the Trustees may have to file
income tax returns (IRS Form 1041 and Form CT-1041) or otherwise report
that the income is taxed to the grantor as "grantor trust" income. Consult
your tax advisor; opinions differ on the best way to handle this issue.
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