Can I Make a Taxable Gift to an ILIT?

 In Irrevocable Trusts
Crummey powers

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Question:

I set up ILIT 20 years ago and added cash and sent the required Crummey letters each year. I’m now thinking of making a large gift to the trust and filing a gift tax return covering the excess. Does this work ?

Response:

Yes, that does work. For readers who don’t know, an “ILIT” is an irrevocable life insurance trust. These trusts are designed to exclude life insurance proceeds from the decedent’s taxable estate. They were used more often when the estate tax credit was $1 million than the current $11.7 million threshold.

“Crummey” letters are named after the court case that authorized their use. Here’s how they work: Typical ILITs permit the beneficiaries to withdraw funds transferred to the trusts for a period of time after the transfer, usually 30 days. This right of withdrawal allows the trust deposits to be treated as gifts to such individuals and to qualify for the annual $15,000 exclusion for gift taxation. In order to qualify, the beneficiaries must receive written notice of their right of withdrawal, the so-called “Crummey” letter.

The only reason to carry out the exercise of sending Crummey letters is to qualify for the annual gift tax exclusion for gifts to individuals. If you’re making a larger gift, as you plan, and are not concerned about it being taxable, there’s no reason to send Crummey letters except, perhaps, to reduce the amount of the gift that is subject gift tax reporting by $15,000 per beneficiary.

Related Articles:

Will Property in Irrevocable Trust be Subject to Estate Taxes When the Grantor Dies?

A Life Insurance Primer

The Irrevocable Life Insurance Trust

Showing 2 comments
  • Stacy
    Reply

    My husband is the sole grantor of a life insurance policy in an ILIT for our son (the sole beneficiary). Can I, as his spouse, also give to the ILIT for the payment of premiums; ultimately allowing us to give up to $30,000 tax-free as the grantor and his spouse to the sole beneficiary through the ILIT? Phrased another way is there any limit on who gives the money to pay the premiums on the insurance policy held in the trust?

      • Harry Margolis
        Reply

        Stacy,
        Yes, you can also give $15,000 a year to the ILIT and it will qualify for the annual gift tax exclusion. Remember to include this in the Crummey letter you send your son. And, of course, it means that you can’t give the $15,000 outright to your son for his current use.
        Harry

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