On Thursday, I talked about securing a life insurance policy within a trust. It is an excellent way to reduce the size of an estate, and avoid the estate taxes. However, the government is usually not about to let a large asset go untaxed. When an irrevocable life insurance trust is established, the grantor of the trust is relinquishing any right to the policy and gifts it to the future beneficiary. Even though the beneficiary does not have access to the funds until the grantor dies, the government still sees the transfer as a gift. Once the policy is set aside, annual premiums may face gift taxes as well. This is where it can get a little sticky. The government allows gifts under the annual exclusion to avoid the gift tax (the annual exclusion is updated annually, so make sure to look it up). However, a gift must be a present interest gift, meaning the beneficiary must have immediate access to the gift. Therefore, paying premiums on a life insurance policy is a future interest gift. Well, someone got really upset and took this to court and actually won. Thanks to Crummey vs. U.S., trust beneficiary’s are able to withdrawal the annual contribution to the trust within 30 days. This now makes the annual premiums paid to a trust a present interest gift. This may seem scary, considering the same irresponsible son mention in Thursday’s blog has a right to withdrawal the annual contributions made to the trust. Hopefully, after discussing the power of asset accumulation within a insurance policy, the son will be less tempted to affect his future policy.