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In order for New York to successfully compete with other states in attracting trust business, it is necessary for several provisions in the Estates, Powers, and Trusts Law to be amended. This discussion focuses on the need to clarify EPTL �7-3.1 as it relates to the beneficiaries of an irrevocable life insurance trust. One of the most widely used estate tax planning devices is the “irrevocable life insurance trust.” In order to avoid estate tax inclusion of the death benefit payable under a life insurance policy, many opt to have the policy owned by an irrevocable trust. As long as the trust is funded with a new policy, or the grantor transferred his or her existing policy into the trust prior to three years before death, the proceeds will escape estate tax. Once the trust is in place, the grantor typically gives the trustee money for the trust to pay the life insurance premiums. This transfer of property to the trust is considered a gift to the beneficiaries (usually the grantor’s children and/or grandchildren). In order for the grantor to be able to utilize his or her annual exclusions from federal gift tax (currently $11,000 per donee), the beneficiaries must be given a present interest in the property transferred to the trust. This is usually accomplished by giving the beneficiaries a limited power of appointment that permits the beneficiary to elect to withdraw the greater of $5,000 or 5 percent of contributions made to the trust each year (but not exceeding $11,000). ‘Crummey’ Powers These powers of withdrawal are referred to as “Crummey” powers in light of the decision in Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968). The IRS in Rev. Rul. 73-405, 1973-2 C.B. 321 has assented to the legitimacy of the arrangement. The power of withdrawal causes a beneficiary to be deemed the owner of the property for federal estate and gift tax purposes. Normally, this would mean that the property subject to the power would be included in the estates of beneficiaries. However, the Internal Revenue Code [sections 2041(b)(2) and 2514(e)] permits the power of withdrawal to lapse if not exercised by the beneficiary. Thus, gifts to a life insurance trust may qualify for the gift tax annual exclusion by granting the trust beneficiaries powers of withdrawal, which will lapse without tax consequence to the beneficiary if he or she (hopefully) does not exercise the withdrawal power. Ambiguous Law It is at this juncture that ambiguity in New York law may cause a problem for the beneficiaries. EPTL �7-3.1 and CPLR �5205 provide that contributions to a self-settled trust are permanently subject to the grantor’s creditors. Applied to our life insurance example, the concern is that a beneficiary whose power of withdrawal lapses will be treated as a “grantor” with respect to the property “contributed” by virtue of the unexercised or lapsed withdrawal power. This would theoretically allow the beneficiary’s creditors to access the lapsed withdrawals. This, in turn could result in estate tax inclusion, notwithstanding the lapse protections of IRC ��2041(b)(2) and 2514(e). This is because IRC �2041 provides that property subject to a “general power of appointment” is includible in one’s estate. For estate tax purposes, a general power of appointment is defined, in part, as property that a power holder can appoint to his or her creditors. In this context, New York EPTL �7-3.1 could potentially allow a beneficiary’s creditors to attach property over which the beneficiary has the power to withdraw. It is the lapse of this power that can cause a beneficiary to be treated as the grantor of a self-settled trust. Thus, subject to creditor claims under state law, the beneficiary is deemed to have a general power of appointment over the property, which will, in turn, subject it to inclusion in his or her estate. To avoid this result, New York law must be clarified to provide that our creditors rights’ doctrine does not apply to property contributed to a trust merely by reason of a lapse, waiver, or release of a power of withdrawal valued at less than 5 percent of the aggregate value of the trust. Without this clarification, estate planning attorneys may be hard pressed not to suggest that an irrevocable life insurance trust be created under the laws of states such as Alaska, Delaware, Nebraska or Texas, which do not pose the possible dangers discussed herein. Ann Carrozza, a practicing trusts and estates and elder law attorney, represents the 26th Assembly District in Queens and is the sponsor of a bill that would clarify NY EPTL �7-3.1.

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