You can take advantage of the annual $14,000 federal estate gift tax exemption (this number is indexed for inflation and is subject to change every year) by having your California probate and trust attorney help you set up what is called a “crummy trust” or irrevocable trust. An irrevocable trust is set up to buy a life insurance policy on your life. You can give up to $14,000 tax free to the trustee each year to pay the premium for the life insurance. The policy is owned by the trust and held for the beneficiaries named in the trust document. The beneficiaries can be your children, other family member or anyone you choose to leave your assets to after you die
By gifting the $14,000, you are reducing the value of your overall estate so that when you die, you reduce your estate tax liability as well. Currently estates valued at $5,400,000 or under are exempt from federal estate taxes. This amount is indexed for inflation every year.
Advantages of Crummy Trusts
Upon your death, the insurance company will pay the life insurance money to your trust. The trustee will distribute the assets of the trust under the terms of the trust documents. Your children can benefit from receiving the life insurance money income and estate tax free either over a period of time or in one lump sum, while your estate avoids having to pay any federal estate taxes on the money because the trust owns the policy, and it is not included as part of the value of your estate.
The trustee of your trust must send a letter every year to your beneficiaries advising them that they can take the $14,000 out of the trust each year within a specific period of time so that the money qualifies as a tax free gift under the IRS rules. In order to make sure your gift is considered as a tax free gift by the IRS, it is advisable to have a California probate and estate attorney help you with this type of project. The attorney can answer any questions you may have concerning the trust and help you with the transfer of any assets to your trust.