Crummey Power Note / Crummey Letter

The Dictionary of Insurance Terms and Definitions

A Crummey power note is used in conjunction with a life insurance trust to avoid incurring unwanted taxes.  In this arrangement, a trust plays the role of third-party owner for a life insurance policy, and the insured (or anyone else) funds the life insurance policy by making donations to the trust.

Named for the 9th Circuit Court Case Crummey v. Commissioner (1968), a Crummey power note or Crummey letter is a document which grants a trust’s beneficiaries a temporary right to access funds in a trust: after each donation is made to the trust, the trust’s beneficiaries have a specified period (usually 3 months) in which they may withdraw their share of the donation.

The beneficiaries are not actually intended to withdraw their share, however (that money is to be used to pay insurance premiums).  The purpose of a Crummey power note is merely to create a “present interest” for the beneficiaries.  Present interest is required by the Internal Revenue Code in order for the annual gift tax exclusion to apply to a donation.

(The rationale behind the arrangement described herein begs further explanation.  This is intended only to provide a cursory sense of a Crummey power note.)