In the Estate of Turner v. Commissioner T.C. Memo 2011-209 (August 30, 2011), the Tax Court held that so long as the Grantor of an irrevocable life insurance trust grants a power of withdrawal to beneficiaries, the gift is an indirect present interest gift qualifying for the annual exclusion. The import of this ruling is that it extends the rule of Crummy to include gifts with a power of withdrawal where no written notice is given to the beneficiary.

So, let’s say Clyde and his wife Jewell creates an irrevocable life insurance trust. He buys a $3 Million policy and the annual premiums are $81,000 per year. He has three children who are beneficiaries of the trust upon his death. The trust grants the children the right to withdraw any gifts to the trust or for the benefit of the trust. Clyde decides to directly pay the life insurance premiums directly from the joint checking account with Jewell in lieu of paying some trustee to get the check and reissue a new check. No letters are sent to the beneficiaries informing them of their right to withdraw the premium monies from the trust. That should be a gift of a future interest, right? Wrong says the Turner decision. The court emphasized that the power to demand withdrawals after each direct and indirect transfer to the Trust was given to the beneficiaries in the Trust. The fact that some or even all of the beneficiaries may not have know of their right to withdraw is irrelevant. Thus, it is a present interest gift.

Why is that important? Each person has a right to give up to $13,500 per year per donee. This means that Clyde could give $13,500 to each of his children each year. It also means that Jewell could give $13,500 to each of her children each year (or any other individual that she wanted to give to). That means that Clyde and Jewell could give away $81,000 each year to their three children. This does not reduce the $5 Million each that they can give away when they die. In other words it’s a huge benefit to families trying to reduce estate taxes.

I’d still recommend giving the Crummy notices to the beneficiaries. This is but one Tax Court ruling and could be reversed, revised, distinguished or ignored. But at least if there is a mistake, you have at least one arrow to fire back when assessed a gift or estate tax.