Crummey Powers and Annual Exclusion Gifting: Making ILIT Contributions IRS-Proof

Irrevocable Life Insurance Trusts (ILITs) are a cornerstone strategy for high-net-worth (HNW) estate planning in the United States. When properly funded, an ILIT keeps large life insurance proceeds out of the grantor’s taxable estate and provides crisp liquidity for estate taxes, equalization, and legacy planning. The most commonly used tool to make ILIT premium gifts qualify for the annual gift tax exclusion is the Crummey power—and when correctly executed it makes ILIT contributions effectively “IRS-proof.”

This guide explains how Crummey powers work, practical implementation steps for HNW clients in major U.S. markets (New York City, San Francisco Bay Area, Miami, Chicago), cost considerations, trustee selection and compliance pitfalls, and how to document gifts so the IRS treats them as present-interest exclusions.

Key facts and tax figures (U.S., 2024)

• Annual gift tax exclusion (per donee): $18,000 (2024). This is the amount each donor may give to each donee without reducing lifetime exemption or filing gift tax (except Form 709 reporting requirements when applicable). Source: IRS Gift Tax (see links at end).
• Lifetime estate & gift tax exemption: subject to legislative change; consult a tax advisor for year-specific amounts. See broader context at Tax Foundation for historical/annual updates.

Sources used: IRS gift tax pages and Tax Foundation estate tax analyses (links at end).

What is a Crummey power?

A Crummey power is a limited right granted to ILIT beneficiaries that allows them to withdraw a gifted premium contribution for a short period (commonly 30–60 days). The right to withdraw must be a genuine present interest; if beneficiaries have a real opportunity to access the funds during the notice window, the IRS treats the contribution as a present-interest gift and the annual exclusion applies.

Crummey powers are named after the 1968 case Crummey v. Commissioner, where the court recognized that gifts accompanied by a temporary withdrawal right qualified for exclusion.

Why Crummey powers matter for ILIT funding

Without a valid present-interest gift, annual exclusion protection fails and the gift is treated as a future interest—meaning it’s not eligible for the annual exclusion and may eat into the grantor’s lifetime exemption. For HNW families using ILITs to remove multi-million-dollar insurance policies from their taxable estates, repeated failure to secure annual exclusion status can create large, unintended gift/estate tax consequences.

Implementing a Crummey power: step-by-step

1. Draft the ILIT properly

   • Include explicit beneficiary withdrawal rights (Crummey powers), notice requirements, and default procedures if beneficiaries do not exercise the withdrawal right.
   • Work with an experienced estate planning attorney licensed in your state (NY, CA, FL, IL—state law and trust rules vary).

2. Set the notice window

   • Typical withdrawal periods: 30–60 days. Many practitioners use 30 days for administrative ease; some prefer 60 days to be conservative.

3. Provide timely, documented notices

   • Notices must be sent to each beneficiary every time a premium gift is made.
   • Notices should state the amount, the withdrawal deadline, and consequences of non-withdrawal.
   • Keep proof of delivery (email receipts, certified mail, trustee logs).

4. Track and accept “requests”

   • If a beneficiary withdraws funds, honor the request. In practice, withdrawals are rare; most beneficiaries waive their right in writing or by failing to act.
   • Retain signed waivers or default-withdrawal documentation to prove the gift was a present interest.

5. File Form 709 when required

   • Even if the gift qualifies for annual exclusion, Form 709 may be required (e.g., if gifts exceed exclusion per donee or if other reportable events occur). Consult the trustee’s tax advisor.

Practical compliance and trustee duties

Trustees have an active compliance role:

• Issue Crummey notices timely.
• Maintain a gifts log and copies of notices and waivers.
• Coordinate premium payments with insurance carriers.
• File or coordinate gift tax returns (Form 709).
• Manage the trust’s small cash account to accommodate potential withdrawals.

Common administrative practice for ILITs that fund life insurance premiums:

• Keep a modest “trust treasury” (e.g., $5,000–$25,000) to satisfy any withdrawal requests and avoid policy lapses.
• Replenish the treasury as needed via additional Crummey-eligible gifts.

Cost considerations — trustee services, setup, and ongoing fees

ILITs are administrative but specialized. Below is a realistic view of typical pricing structures and providers used by HNW families in major markets:

Notes and references:

• Trustee fee ranges draw on industry norms; individual quotes vary based on AUM, complexity, and policy management needs. For an accessible primer on trustee charges, see Nolo’s guide on trustee fees.
• High-net-worth families often prefer firms that combine trust administration with bespoke wealth management (Bessemer, Northern Trust, and others). Confirm fee schedules and minimums directly with the provider before engagement.

Which life insurance carriers and policy structures are typically used?

HNW ILITs commonly hold:

• Permanent policies: Indexed universal life (IUL), variable universal life (VUL), or guaranteed universal life (GUL) for lifetime coverage and estate liquidity.
• Large face amounts: $5M–$50M+ depending on estate tax exposure.

Common carriers used by HNW planners:

• Northwestern Mutual, MassMutual, New York Life, Prudential, John Hancock. Premiums vary widely by age, health, and policy type:
• Example illustrative range (not a quote): For a healthy 50-year-old male purchasing a $5,000,000 permanent policy, first-year premium could be anywhere from $20,000 to $150,000+ depending on product guarantees and underwriting class. Obtain carrier-specific illustrations during case design.

Always obtain multiple carrier illustrations and involve the trustee in carrier selection to ensure the policy design aligns with ILIT administrative realities.

Common pitfalls that undermine Crummey qualification

• No contemporaneous notice: failing to send timely written notice to beneficiaries eliminates present-interest argument.
• Unrealistic withdrawal windows or fixed, unusable withdrawal mechanics: e.g., making withdrawal impractical or impossible in practice.
• Commingling premiums: sending funds directly to the insurance company without routing through the trust’s account and documenting the gift/notice cycle.
• No treasury to honor withdrawals: if a beneficiary attempts to withdraw and the trust has no cash, the IRS may question the present interest status.
• Using the same beneficiary as both settlor and sole beneficiary without appropriate safeguards—consult counsel for grantor-trust interactions.

See additional implementation safeguards in our related article: Common ILIT Implementation Mistakes and How HNW Advisors Avoid Them.

When Crummey may not be optimal

• Large premium payments exceeding many beneficiaries’ annual exclusions (e.g., a $200,000 premium with only two beneficiaries) can make reliance on Crummey unattractive. Alternatives include:
  • Splitting premiums across more donees (spouse, children, grandchildren) up to exclusion limits.
  • Using the donor’s lifetime exemption (with Form 709 planning).
  • Premium financing strategies (with specialized ILIT designs—see: ILIT Design for Premium-Financed Policies: Compliance and Estate Inclusion Risks).

Documentation checklist (minimum)

• Signed ILIT instrument with Crummey clauses.
• Written beneficary notice sent every gift cycle (email + certified mail recommended).
• Trustee gifts ledger and trust treasury balance.
• Copies of signed waivers or evidence of no-withdrawal (beneficiaries’ inaction documented).
• Form 709 filings if required.

Conclusion

For HNW clients in markets such as New York City, the Bay Area, Miami, and Chicago, the Crummey power remains the most reliable method to secure annual exclusion treatment for ILIT premium gifts—if executed with disciplined notices, trustee oversight, and documentation. The combination of appropriate trust drafting, trustee selection, and robust administrative processes will make ILIT contributions “IRS-proof” in practical terms.

Internal resources that expand on ILIT implementation and governance:

• ILITs Explained: A Step-by-Step Guide for High Net Worth Estate Planning
• Funding Strategies for ILITs: Premium Payments, Gifts, and Trust Treasury Options
• ILIT Governance: Trustee Selection, Distribution Rules, and Policy Management

Authoritative references

• IRS — Gift Tax: https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax
• Tax Foundation — Estate & Gift Tax resources and annual figures: https://taxfoundation.org/topics/estate-and-inheritance-taxes/
• Nolo — How Much Does a Trustee Charge?: https://www.nolo.com/legal-encyclopedia/how-much-trustee-charges.html

For precise dollar figures and policy illustrations tailored to a specific client (age, health, policy type), obtain carrier illustrations and quotes from fiduciary trustees (Northern Trust, Bessemer Trust, Fidelity Personal Trust) and coordinate with a qualified estate planning attorney in your state.