1. What is our
process?
Premium Administration, LLC reminds
the trustor(s) early that a gift
will soon be due. Once the gift
is made, we work with the trustee
to document the gift to ensure
it is recognized as an annual gift
tax exclusion amount by the Internal
Revenue Service (IRS). When appropriate
notice periods are completed, we
forward payments for premiums and
follow up to verify their receipt
and proper crediting by the insurance
company.
A nice feature of our process is that
approximately 45 days prior to a trust
owned insurance policy premium due
date, we send a letter to the trustor(s).
The letter includes the recommended
gift amount to be able to meet all
trust payment obligations, and includes
instructions on how to properly make
the gift.
When the trustor(s) make their gift,
they send it to the trustee in a pre-addressed
envelope (provided by our firm). In
the envelope, along with the gift to
trust, are instructions for the trustee
to follow in properly accepting the
gift to trust. The trustee performs
their fiduciary duty with the gift,
and then forwards the insurance premium
payment to PA for the rest of the administrative
paper trail to be created, mailed,
and archived for defense in any future
IRS trust audits.
Once PA receives information on the
gift to trust and corresponding premium
payment decisions made by the trustee,
Crummey notices are sent out to beneficiaries
to validate the annual gift tax exclusion
qualification requirements. The premium
payment is held for the trust Crummey
waiver period. After the Crummey waiver
period expires, the premium payment
is forwarded to the insurance company
and PA verifies the premium payment
has been received.
2.
Why is the process important?
The IRS Internal Revenue Code (IRC)
provides an annual tax exclusion
amount of $12,000 (applicable
for 2008; this amount is indexed
for
inflation, and will move up at
some point in the future). This
gift tax annual exclusion amount
is offered per person making
the gift and per person receiving
the
gift. The tricky part is that
the annual gift tax exclusion is
only
offered by the IRC for gifts
of “a
present interest”. That means
the gift must be complete…the
person doing the giving fully relinquishes
all rights to possession and use
of the gift, and the person receiving
the gift gains all rights to possession
and use of the gift property.
When a trustor makes a gift to a
trust, indirectly benefiting someone
in the future, they are not considered
to have a present interest in the
gift to trust, because they cannot
immediately use and enjoy the gift
property. In order to meet the present
interest requirement, many irrevocable
trusts will allow a limited right
of withdrawal to each beneficiary,
thus making the argument to the IRS
that the gift to trust does in fact
qualify as a gift of a present interest.
The process of making gifts correctly,
documenting notices to beneficiaries,
and observing gift waiver periods
is critical to the IRS acceptance
of this present interest argument
and allowing gifts to trust to not
be charged a gift tax.
3.
Why is the gift requested 30-45
days
ahead of the premium due
date?
4.
The Trustor receives the gift reminder
letter in March but the premium
is not due until May. Why is this?
Most trusts have a gift notice
waiver period of 30 days or longer.
This waiver period gives time for
the beneficiary to be notified
of the gift to trust and take action
should they wish to exercise their
withdrawal rights. Administratively
this means the gift must be made
more than 30 days in advance of
the premium due date to allow for
the notices to be sent, and the
beneficiary’s withdrawal
right to lapse.
After the beneficiary withdrawal
rights lapse, the premium check can
be sent to pay for the insurance
owned by the irrevocable trust.
Failure to observe this waiver period
can, under IRS administrative audit,
call into question the present interest
status of gifts to trust, and cause
those gifts to be taxed under the
gift tax rates, or reduce the lifetime
estate tax exemption equivalent.
Because the procedures for validating
a present interest are well known
and easily accomplished, the loss
of exemption equivalents or the addition
of a gift tax to a trustor’s
estate is completely needless.
5.
What is a Crummey Notice?
In the 1960’s, the IRS attempted
to apply and gift and estate tax
to a trust that had been set up to
receive gifts on behalf of its beneficiaries.
The taxpayer who decided to fight
this IRS decision became the court
case that set the precedent for establishing
a present interest capacity for gifts
to trust. The case, Crummey v: Commissioner,
was the first case to establish that
if a beneficiary can withdraw some/all
of a gift to trust, then the gift
to trust will qualify as a present
interest.
So, a Crummey Notice is simply a
tax jargon/name for the physical
letter that is sent to beneficiaries
of irrevocable life insurance trusts,
informing them of a gift to the trust
and their withdrawal rights for the
gift.
6.
Community Property/Joint Property
waiver… What
is it for? Why is it important?
There are nine community property
states: Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas,
Washington, and Wisconsin. Puerto
Rico allows property to be owned
as community property also. Alaska
is an opt-in community property state;
property is separate property unless
both parties agree to make it community
property through a community property
agreement or a community property
trust. In the absence of a community
property state, property may be considered
owned jointly.
Property held as community property
means each spouse technically owns
an undivided one-half interest in
the property.
If a trust is created by only one
trustor who is married, it is important
that gifts to the trust either come
from a sole and separate account
or, request that the non trustor
spouse sign a community property
or joint property waiver. In the
event the married trustor passes
away before the non-trustor spouse,
failure to observe these details
could result in insurance proceeds
being included needlessly in the
surviving trustor(s) estate. Since
one prime motive of most all irrevocable
trusts is to keep assets from ever
being included in a trustor or a
trustor spouse’s estate, failure
to separate community or joint property
may cause inclusion of trust assets
in the surviving spouse’s estate
7.
Who owns the trust insurance
policy?
8. Who
is the beneficiary of the trust
insurance policy?
For a policy to be considered part
of the irrevocable life insurance
trust the insurance company should
list trust and trustee as owner.
The beneficiary is the trust. For
example:
Owner: The Irrevocable Life Insurance
Trust of John Smith, Jane Smith Trustee
Beneficiary: The Irrevocable Life
Insurance Trust of John Smith
9.
Where should premium notices
be sent?
When using our services, insurance
premium notices should be sent
to Premium Administration, LLC.
Otherwise
the premium notice should be
sent to the trustee.
Because we track all premium due
dates in our own proprietary database,
we are not dependent upon receiving
a premium notice to generate our
gift request letters or due date
monitoring. However, receiving premium
notices directly from the insurance
company is the most efficient way
to forward premium payments to the
insurance companies, and helps prevent
premium checks from being improperly
credited to the wrong account, or
premium notices being sent to a payment
center that has been recently closed
or changed.
10.
Why does my annual statement
or other
insurance correspondence go
to Premium Administration,
LLC as well as the premium notice?
Sometimes insurance companies only
have one mailing address for correspondence
which includes premium notices, annual
statements and other notices. We
forward annual statements and unusual
notices to the trustee and to the
trustor(s).
11.
Why can’t the Trustor
write a check directly to
the insurance company?
A check directly written to the insurance
company by a Trustor bypasses the
roles and responsibilities of the
Trustee to the Trust.
In addition, because the trustee
never held the funds, and never had
an opportunity to give the beneficiaries
advance notice of the gift to trust
before deciding to pay insurance
premiums, there cannot be any gift
of a present interest to the beneficiaries.
The lack of a present interest in
the gift means that the trustor should
file a gift tax return for that year,
and either choose to pay an additional
gift tax, or reduce the lifetime
gift tax exemption and/or estate
tax exemption equivalent, by the
amounts gifted.
12.
Who does the Trustor write the
gift
check to?
The trustor writes the gift check
to the Trustee. The Trustee then
has the responsibility to ensure
the funds are used per the trusts
specifications. For example:
Pay to the order of: Jane Smith,
Trustee
Memo Field: Gift to Trust
13.
Why is the gift more than the
insurance
premium amount?
Many attorneys suggest that the amount
gifted to an irrevocable
trust not equal exactly the amount
of premiums paid, lending greater
credence to the trustee's absolute
ability to decide where
best and how
best to handle gifts to trust. When
working with Premium Administration,
LLC, we automatically include the
amount of any fees in
the Crummey
notices and gift calculations, so
your gift to truste is never exactly equal to the premium payment
amount.
14.
Does the Trust need a Trust Checking
Account?
It is a best practice to have a separate
trust checking account. This practice
reinforces the separation of the
trustor’s estate from the irrevocable
trust funds, and transfers fiduciary
duty over those funds to the Trustee
at the time of deposit of the gift
check into the trust checking account.
Having a separate trust checking
account also enables the trustee
to respond to beneficiary request
for a withdrawal of assets by simply
writing them a check for their share
of the gift amount, or their withdrawal
request amount.
There is another option, which is
not considered as conservative for
proving the gift tax annual exclusion
case. Endorsing a check made payable
to a trustee directly over to an
insurance company, without depositing
the check and writing a new check,
can be an effective way to pay premiums.
This is known as a third party check.
There are potential pitfalls with
this methodology, and in our opinion,
the need to fully wait out the Crummey
waiver period BEFORE sending the
check forward for payment, is greater
with third party checks than with
the traditional method.
Generally an insurance company will
accept an endorsed check. This is
not the case for a variable policy…only
term, whole, or universal polices.
In addition, there are some companies
who will not accept third party checks.
If you are considering using the
third party check method to gift
to the trust and ultimately pay the
insurance premium, it is important
to check with the insurance company
to ensure they will accept the 3rd
party check when submitted for payment.
15.
How do I open a Trust checking
account?
The Trustee will need to open the
trust checking account.
It should be a non-interest bearing
account, so that a trustor or trustee
does not need to deal with 1099’s
at the end of the year, and potentially
need to file an income tax return
for the trust for a relatively small
amount of interest income.
In addition, because this account
is for a trust, with a tax ID number,
and not a social security number,
it will be considered a business
account.
Generally, the trustee will need
their driver’s license or other
accepted form of identification,
a Certificate of Trust Existence
and Authority, a tax ID number, and
whatever additional forms or paperwork
the bank requires.
Fees vary from bank to bank. We
may be able to refer trustees to
those banks that are most accommodating
to these types of accounts. Some
banks will also offer a no fee or
low fee account if the trustor is
willing to leave a balance in the
account.
16.
Why do Variable insurance policies
not accept 3rd party checks?
A variable type insurance policy
use stocks and bonds, via mutual
funds, to manage the assets in
the cash account maintained at
the insurance
company for the insurance policy.
Because of this, variable type
insurance policies, and the agents
who sell
them, are required to submit to
monitoring and supervision of
the Securities
and Exchange Commission. The SEC
does not look favorably on third
party checks. This concern over
third party checks became more
stringent
in the wake of the September 11th
attacks and the associated government
legislative actions such as the
Patriots Act.
17. What
is a Trust Certificate of Existence
and Authority?
A Trust Certificate of Existence
and Authority is really an excerpt
of the entire trust document. It
typically contains:
Title page with name of the trust,
trustor(s) and date established
Pages listing the trustee’s
authority within the trust
Signature page with trustor and
trustee signatures
Any amendments to the trust changing
the above information
18.
When might a Trust Certificate
of
Existence and Authority be needed?
The Trust Certificate of Existence
and Authority is used to establish
the trust’s existence and trustee’s
boundaries of authority with financial
institutions. Typical trustee authority
clauses include opening a bank account,
purchasing life insurance or handling
other trust financial assets.
19. Do
I have to give a copy of the
trust document to a bank or other
financial institution?
No. A trust document is considered
confidential. The only thing a financial
institution should need is the Trust
Certificate of Existence and Authority
(TCEA). If a financial institution
will not accept the TCEA, consult
your attorney.
20.
Why does the trust need a separate
Tax Number (TIN/EIN)?
21.
Why can’t the trust use
the Social Security number of
a
Trustor?
Using the Trustor’s Social
Security number on a continuing basis
for the trust won't automatically
cause inclusion in the trustor’s
estate, but it will confuse the issue
of ownership when the policy proceeds
need to be collected. This confusion
could give the IRS a reason to look
closely at the administrative detail
of this trust under audit. Ultimately,
when the insurance proceeds are collected,
an EIN for the trust will be needed.
So it is generally easier to apply
and receive it now, when other estate
issues are not as pressing.
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