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. Mr. 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.  The court agreed with the estate, holding that, because the beneficiaries had an absolute right to demand withdrawals after each premium payment, the gift was a present interest gift that was eligible for the annual exclusion.  Despite the positive result for the taxpayer in the case, proper Crummey gifting is still an essential aspect of life insurance trust administration. Unless insureds are prepared for the expense of litigation, premiums should still be paid through the ILIT and Crummey letters should still be sent to beneficiaries.

For a complete discussion see Advisor’s Journal Tax Court Okays Crummy Crummey Powers

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