161 / Do transfers to a trustee of an irrevocable life insurance trust of amounts to be used by the trustee to pay premiums qualify for the gift tax annual exclusion?

Although such transfers would ordinarily be future interest gifts, it has been held that they will be treated as present interest gifts, qualifying for the exclusion, to the extent the trust beneficiaries are given immediate withdrawal rights with respect to the amounts transferred.¹ Such trusts are known as Crummey trusts, after the case of Crummey v. Commissioner.²

Example. G creates an irrevocable insurance trust for each of his four children, transferring amounts (additions) from year to year to fund the trusts. Two of the children are minors when the trusts are created and for several years thereafter, but neither has a court-appointed guardian. The trusts provide that with respect to the additions, each child may demand in writing at any time (up to the end of the calendar year in which an addition is made) the sum of $5,000 or the amount of the addition, whichever is less, payable immediately in cash. If a child is a minor when an addition is made, the child’s guardian may make such demand on the child’s behalf and hold the amount received for the benefit and use of the child. To the extent demands for payment are not made by the beneficiaries, the trustee is directed to use the additions to pay insurance premiums as needed and to purchase additional insurance and investments for the trust. G transfers to each trust $5,000 each year the trusts are in existence. Each trust provides that it is irrevocable for the lifetime of the beneficiary and that the trust assets will revert to the grantor only if the beneficiary dies before age 21. All children survive past age 21. By the rule of the Crummey case, G is entitled under present law to $20,000 in gift tax annual exclusions each year ($5,000 for each child). It does not matter that the minor children never had guardians appointed. Had the trusts given the beneficiaries immediate payment rights of no more than $2,000 each with respect to the additions, G’s exclusions would be limited to $8,000 per year (assuming he made no other present-interest gifts to his children during the year).

The IRS has ruled that when the beneficiary of a discretionary trust was a competent adult, contributions to the trust did not qualify for the annual exclusion because the beneficiary did not receive timely notice or have actual knowledge of the right to demand immediate distribution of contributions.³

Another ruling allowed the annual exclusion where the trust provided for timely written notice to the beneficiaries of their withdrawal rights, and where the beneficiaries were given a 30-day period within which to exercise their withdrawal rights.⁴