An irrevocable insurance trust was established with the spouse as a trustee and the spouse and two children as beneficiaries. Money is contributed to pay for premiums and the Crummy rules are used to consider the money as gifts to the two children qualifying as present interest gifts. Can the Crummy or other rules be used to qualify part of the money as a present interest gift to the spouse, without using the $1.5 exclusion amount? The goal is to minimize the gift tax and the use of the exclusion amount.
Let's take each slice at a time: An irrevocable insurance trust was established. A trust is often the ideal way to own insurance to keep it out of the insured's estate, and to protect the proceeds for the beneficiaries (protection from taxes, lawsuits, etc.). The spouse is a trustee and the spouse and the two children are beneficiaries. This is common. Its is perhaps more common to have the spouse as a beneficiary as well, but to serve only as co-trustee and with clear restrictions to avoid pulling the insurance proceeds into the spouse's estate. Check with an estate tax specialist as this gets complex. Money is contributed to pay for premiums. That is the correct route. The grantor (person who set up the trust) is also the insured, and makes gifts to the trust to fund (pay for), the premiums. The Crummy rules are used to consider the money as gifts to the two children qualifying as present interest gifts. In simple and quick terms everyone can give away $11,000 (indexed for inflation) per year to any number of people. If the gift is to a trust the beneficiary must have the right to get at the money currently to get this benefit. For a more detailed discussion see Shenkman, The Complete Book of Trusts (John Wiley & Sons). Can the Crummy or other rules be used to qualify part of the money as a present interest gift to the spouse? Yes, but you often will limit the amount for the spouse to $5,000 year and the spouse must be a beneficiary as well. This was not done in your facts. .....without using the $1.5 exclusion amount? The goal is to minimize the gift tax and the use of the exclusion amount. If you meet the requirements for the annual $11,000 exclusion from gift tax you won't use up any of the $1 Million lifetime gift tax exclusion. By the way, you made a common slip. The estate tax exclusion (how much you can give away estate tax free) is now $1.5 million, but the amount you can gift away while alive is still only $1 million. Lots of tricky stuff. Good for the tax lawyers, not great for everyone else.
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