Help for the Trustee*:
8 Steps for Administering a "Life Insurance Trust"

Lisa Nachmias Davis
Attorney at Law
129 Church Street, Suite 805
New Haven, CT 06510
Phone:  203-776-4400 / Fax 203-774-1060 or 776-4411
davis@sharinglaw.net

The procedures described below are used to administer "life insurance trusts" or other trusts with withdrawal rights known as "Crummey Powers." A "Crummey Power" means that the beneficiary has the power to withdraw contributions for a set period of time after the contributions are made (so that the contributor will be able to take advantage of the annual exclusion from transfer taxes). A "life insurance trust" designed so that the life insurance will not be subject to tax when you die typically has these kinds of "Crummey Powers," usually called "powers of withdrawal." (The name "Crummey" refers to a case and is not intended to describe how we feel about these procedures!) Occasionally, only a spouse holds such a power, and these instructions may not apply.

Your attorney or accountant may handle this trust for you, usually for $200-$500 per year. If you (the Trustee) want to handle the trust yourself, you should follow these procedures. If your attorney is handling the trust for you, he or she may use slightly different procedures, such as depositing contributions into, and paying premiums out of, the attorney's "trustee account" or "client funds account."

Tip: If you have a system for "reminders" available with many programs such as Quicken, Outlook, etc., you may want to program in the following dates: (a) date the premium is due (usually the anniversary of the policy), (b) one month prior to that date (to remind the contributor that the trust may need cash to pay the premium) and (c) December 1st (to make sure you have sent out the "Crummey notice").

1. Federal Tax Identification Number or "EIN": The trust should have its own tax identification number ("EIN"). (This is my position; views differ, however.) Your attorney or accountant can help you with this. If you feel able to do so, you can download IRS Form SS-4 and follow the instructions, OR, you can now apply online at www.irs.gov.

2. Checking Account: You should open a checking account in the name of the trust, with either or both Trustees as signatory. Use the trust's tax identification number for the account. The Trustee(s) must sign bank signature cards and order a few checks.

3. Insurance Policies: Owner and beneficiary designations should read:

________ AND _________ AND THEIR SUCCESSORS AS TRUSTEES
OF THE [NAME OF THE TRUST] U/A [DATE OF THE TRUST].

If an existing policy is being transferred to the trust, its owner/beneficiary must be CHANGED by completing forms obtained from the insurance company (or your agent), AND by delivering them to the insurance company. Certified mail is recommended, and you should keep a copy. The Trustees should obtain WRITTEN CONFIRMATION from the company as to the change. You can also ask your insurance agent for help, but make sure you get the confirmation.

4. Billing Address: The insurance premium notice should be billed and directed TO THE TRUSTEES.* If an existing policy is being transferred to the trust, the billing address must be CHANGED by completing what is often a SEPARATE form from the insurance company, AND by delivering it to the company. If the bills continue to go to the old address, check with the company. You may want to ask your agent for help. *NOTE: Obviously, this doesn't work with group term life insurance you may have through your employer. The IRS has informally decided (for now) that this kind of trust still "works" with a group term life policy.

5. Contributions: Before the premium is due, preferably at regular intervals, money should be transferred to the Trustees, and deposited in the trust bank account. *NOTE: this doesnt't apply to a group term life policy.

6. Crummey Notices: Upon receiving any deposit into the account, or no later than December 1st of the year of the deposit, the Trustees must send out the "Crummey Notice" to the individuals named in the trust as having withdrawal powers. (If they are minor, the notice making the payment should be sent to their custodial parent.) The purpose of the notice is to avoid gift tax consequences for the contributing party. Failure to issue the Crummey notices may have more, or less, negative consequences, depending on the amounts of the contributions, the donor's taxable estate, and other factors, so you will want to have proof that the notices were sent, such as a certified mail receipt. When in doubt, consult your advisor. *NOTE: What to do with group term policies? A: If you can, find out what premium is being paid for your policy, send out a notice early in the year that the premium amounts are expected to be contributed, and follow up with a reminder at the end of the year as well. You can also do this if you are arranging to have contributions made by automatic transfer from your account to the trust's account (if you want to continue monthly premium payments). A sample letter follows these instructions.

7. Gift Tax Returns: If contributions (including deposits into the trust account and the cash value of transferred policies) exceed $13,000 (adjusted annually -- this is for 2009) times the number of persons having withdrawal powers (or more if the contributor is married), federal and state gift tax returns (IRS Form 709 and Form CT-709) may have to be filed by April 15th of the following year. If a policy with cash value has been transferred, a gift tax return may be required together with IRS Form 712 completed by the insurance company, stating the "interpolated terminal reserve" value, or gift tax value, of the policy. Consult your tax advisor.  And remember, contributions to a trust with a "Crummey Power" will count towards the "annual exclusion" amount you can give in any year -- $13,000 per donor / per donee (2009)  (if married, a total of $26,000 per donee probable).

8. Income Tax Returns: If the trust has income sufficient to require a tax return (such as interest on an internal policy "account" that holds refunds, excess premium payments, etc. - an ISA account) the grantor of the trust may be required to pay the income tax, and the Trustees may have to file income tax returns (IRS Form 1041 and Form CT-1041) or otherwise report that the income is taxed to the grantor as "grantor trust" income. Consult your tax advisor; opinions differ on the best way to handle this issue.

DISCLAIMER: THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP.
NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN.
PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION

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SAMPLE "CRUMMEY NOTICE" TO BENEFICIARY

============cut here to send Crummey Notice===============

[Return address]

Date: _________________

CERTIFIED MAIL
RETURN RECEIPT REQUESTED # _________________

__________________________[Adult Beneficiary or Child c/o Parent]
__________________________[Address]
__________________________

Re: _______________________ [Name of Trust]

Dear [Beneficiary]:

I am Trustee of ________________________________________________ [Name of Trust], established on __________________ [date of trust]. This is to notify you that a contribution has been made to the Trust [optional: in the amount of ________]. Under the terms of the Trust Agreement, you have the right to withdraw a portion of any contribution to the Trust by written request delivered to me within thirty (30) days of receiving this letter. Please advise me in writing if you wish to exercise this right.

You need not respond to this letter. Should you have any questions, however, please feel free to contact me.

Very truly yours,

______________________
[Name]
Trustee

(May be signed on behalf of Trustee by an agent authorized by the Trustee)