What is a “Crummey Power”?

When a life insurance trust is set up that requires the continuing payments of premiums, the creator of the trust usually makes gifts, often on an annual basis, to provide the funds necessary to pay the premiums on the policy. In order to have these gifts qualify as present interest gifts and come within the $12,000 per person exclusion it is necessary to the beneficiaries of the trust (often a spouse and children) to have the right to choose to receive the funds given to the trust rather than have them used to pay the premium. It is expected that the beneficiaries will not make a demand for such funds, but will rather allow them to be used to continue to pay for the premiums for the trust which will eventually bring them a greater amount.