Adding Beneficiaries to an Irrevocable Life Insurance Trust

If the owner and beneficiary of the a life insurance policy is an irrevocable life insurance trust (“ILIT”), the proceeds from the life insurance policy would not be included in her estate and could be used to completely provide funds to pay any estate tax liability. Many of our estate planning clients have an additional issue to be aware of in creating ILITs: federal gifting laws. Because premium payments must be made through the trust, that trust must be funded. And as was discussed above, the way to fund an irrevocable trust is to make a gift into it. Therefore, the grantor will make a gift by way of writing a check into the ILIT bank account in the amount of the premium. The current federal laws state that a gift of under $13,000 per year per person is not reportable to the IRS.

So what if the premium for the widow is $50,000 per year and there is only one beneficiary? Estate of Cristofani allowed gifts to contingent beneficiaries. Therefore, the first $13,000 of the yearly premium would be considered a non-reportable gift to the beneficiary under the ILIT. The remaining $37,000 could be divided up between four contingent beneficiaries who would be entitled to shares of the ILIT should the beneficiary predecease the grantor.

However the use of contingent beneficiaries may prompt the IRS to audit and litigate. A more conservative approach is to follow the IRS rulings: only beneficiaries who receive a vested current interest in the trust or a vested remainder interest in the trust at the time death benefits are payable to the ILIT should be used as Crummey beneficiaries. The Cristofani/Kohlsaat/Holland (court cases) approach is to allow any grandchild or great-grandchild alive at the time the grantor contributes premiums to the ILIT to be named a Crummey beneficiary. The aggressive approach is to provide Crummey powers to friends and relatives of the grantor who do not otherwise have an interest in the ILIT.

Our law firm has helped hundreds of clients with their estate planning needs.