How are payments for ILIT premiums treated for gift tax?
Key takeaway
Premium payments into an irrevocable life insurance trust are generally treated as gifts to the trust. Practitioners describe adult children's contributions toward premiums on a policy owned by the trust as gifts that must fit within annual gift tax exclusion limits. Crummey withdrawal rights are described as requiring written notice to each beneficiary.
Contributions as gifts
Estate planning practitioners describe adult children who split premiums on a survivorship policy owned by an irrevocable life insurance trust as making gifts to the trust.
When a trust lacks collateral after poor policy performance, a grantor-insured guarantor may need to contribute assets to the trust. Those contributions are described as gifts for gift tax purposes.
Crummey notices
Practitioners say Crummey withdrawal rights require written notice to each beneficiary. They describe the withdrawal period as usually 30 days.
Practitioners with audit experience say the IRS may request copies of the notices and signed acknowledgments, and that failure to send notices has led to annual exclusions being denied.
Loans to the trust
Practitioners describe a loan to a trust as not a gift. There is still no gift if the note allows interest to accrue, and the loan can run for the life of the insured.
A lump-sum loan to fund future premiums is described as reducing bookkeeping and locking in the interest rate when the loan is made.
