CALDERWOOD & HARKNESS LLP 375 Park Avenue, 42nd Floor New York, New York 10152
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
MEMORANDUM
Right-click to update Table of Contents
I. Executive Summary
This memorandum sets forth the legal structure, tax analysis, and ongoing administrative requirements of the Caldwell Family Insurance Trust (the "ILIT"), an irrevocable trust established on March 15, 2023 as a core component of the comprehensive generational estate plan for Jonathan R. Caldwell. The ILIT has been designed to hold a $15,000,000 second-to-die universal life insurance policy outside of the taxable estates of Jonathan R. Caldwell and Eleanor V. Caldwell, thereby providing dedicated estate tax liquidity upon the death of the surviving spouse without increasing the federal estate tax base.
The ILIT is structured as a Delaware-situs irrevocable trust with an independent institutional trustee, Northgate Trust Company of Delaware, serving as sole trustee. The trust incorporates Crummey withdrawal rights for three adult beneficiaries — Thomas R. Caldwell, Katherine C. Hartfield, and Olivia G. Caldwell — to convert annual premium contributions into present-interest gifts eligible for the gift tax annual exclusion under Section 2503(b) of the Internal Revenue Code (the "Code" or "IRC"). Annual premium funding is coordinated to maximize the use of available annual exclusions while minimizing consumption of Mr. Caldwell's remaining lifetime gift tax exemption.
The life insurance policy held by the ILIT was issued by Beacon Life Assurance Company, Policy No. BLA-2023-77419, and insures the joint lives of Jonathan R. Caldwell (date of birth: March 14, 1956; age 67) and Eleanor V. Caldwell (date of birth: September 22, 1958; age 64). The policy is a second-to-die (survivorship) universal life insurance policy with a death benefit of $15,000,000, payable upon the death of the second insured to die.
The estate planning context is significant. Mr. Caldwell's estimated gross estate is approximately $300,000,000. Without any estate tax planning, the estimated federal estate tax liability would be approximately $117,532,000 at the current 40% marginal rate. The estate is heavily weighted toward illiquid assets — including real estate holdings, private fund interests, carried interest positions, and fine art — making estate tax liquidity a critical planning objective. The ILIT's $15,000,000 death benefit is intended to provide a dedicated, estate-tax-free source of liquidity to fund a portion of the remaining estate tax liability after all other planning strategies have been implemented, thereby avoiding the forced liquidation of illiquid assets at potentially distressed valuations.
This memorandum addresses in detail: (1) the ILIT's legal structure and key trust terms; (2) the Crummey withdrawal notice mechanism and its role in converting premium contributions into present-interest gifts; (3) the gift tax annual exclusion treatment and the use of lifetime exemption for the balance of each annual premium; (4) the three-year lookback rule under IRC § 2035 and its implications for the Caldwell ILIT; (5) premium funding logistics and sequencing; (6) ongoing administrative requirements, including Crummey notice procedures, trustee responsibilities, and policy monitoring; and (7) the coordination of the ILIT with the other components of the broader Caldwell estate plan.
II. Background and Estate Planning Context
A. Client Profile
Jonathan R. Caldwell, age 67, resides at 418 East 72nd Street, Apt. 14A, New York, New York 10021. Mr. Caldwell is the founder and former Managing Partner of Caldwell Ridgeline Capital LLC, an asset management firm with approximately $2.1 billion in assets under management. Mr. Caldwell retired from active management of the firm in 2019 but retains a significant carried-interest position in multiple fund vintages and limited partnership stakes in the firm's investment vehicles.
Mr. Caldwell's estimated gross estate is approximately $300,000,000, composed of the following principal asset categories:
Mr. Caldwell has been married to Eleanor V. Caldwell since 1985. All property held by Mr. Caldwell is separate property under New York law. Mrs. Caldwell holds approximately $18,000,000 in separate assets, which are not included in the foregoing estate estimate.
Mr. and Mrs. Caldwell have three adult children:
1. Thomas R. Caldwell, age 38, residing at 55 Perry Street, Unit 3, New York, New York 10014.
2. Katherine C. Hartfield, age 35, residing at 210 Briarcliff Lane, Greenwich, Connecticut 06830.
3. Olivia G. Caldwell, age 30, residing at 1240 North Dearborn Street, Apt. 807, Chicago, Illinois 60610.
Mr. and Mrs. Caldwell have four grandchildren:
1. James W. Hartfield, age 8 (child of Katherine C. Hartfield).
2. Charlotte M. Hartfield, age 5 (child of Katherine C. Hartfield).
3. Lucas T. Caldwell, age 3 (child of Thomas R. Caldwell).
4. Nora E. Caldwell, age 1 (child of Thomas R. Caldwell).
Olivia G. Caldwell does not currently have children.
B. Estate Tax Exposure and Liquidity Need
The estate tax exposure confronting Mr. Caldwell's estate is substantial. Without any estate planning, Mr. Caldwell's estimated taxable estate would be approximately $293,830,000, calculated as follows:
Gross estate: $300,000,000 Less: Remaining applicable exclusion amount (lifetime exemption): ($6,170,000) Estimated taxable estate: $293,830,000 Estimated federal estate tax at 40% marginal rate: approximately $117,532,000
The broader estate plan — encompassing zeroed-out GRATs, the dynasty trust, and the family foundation — is projected to reduce the taxable estate by approximately $60,000,000 to $75,000,000. Even with these reductions, the remaining estate tax liability is expected to be significant, potentially ranging from approximately $85,000,000 to $92,000,000 depending on the performance of the GRAT assets and the timing of the deaths of the insureds.
Critically, the composition of Mr. Caldwell's estate is heavily weighted toward illiquid assets. Real estate held through Stonecrest Realty Holdings LLC constitutes approximately 44.7% of the estate, carried-interest and private fund stakes constitute approximately 12.7%, and art and collectibles constitute approximately 3.0%. In aggregate, approximately 60% of the estate consists of assets that cannot be readily liquidated at fair market value within the time constraints imposed by the nine-month estate tax payment deadline under IRC § 6075(a). While IRC § 6166 may provide some relief for closely held business interests, much of the illiquidity relates to real estate and art, which do not qualify for installment payment treatment.
The ILIT's $15,000,000 death benefit is therefore designed to serve as a dedicated, estate-tax-free source of liquidity that the trust beneficiaries (or the estate, through purchase of estate assets from the ILIT) can deploy to fund a portion of the estate tax obligation. By providing this liquidity outside the taxable estate, the ILIT avoids the self-defeating dynamic in which estate assets used to pay estate taxes are themselves subject to estate tax — the so-called "tax on the tax" problem.
C. Coordination with Overall Estate Plan
The ILIT is one component of a multi-faceted estate plan that Calderwood & Harkness LLP has designed and is implementing for Mr. Caldwell. The other principal components of the plan include:
Grantor Retained Annuity Trusts (GRATs). Three zeroed-out GRATs have been established, each designed to transfer appreciation on the underlying assets to the remainder beneficiaries (the Caldwell Family Dynasty Trust) free of gift and estate tax:
• GRAT A — Securities GRAT: Funded with $60,000,000 in publicly traded securities; two-year term; remainder to the Dynasty Trust.
• GRAT B — Realty GRAT: Funded with $80,000,000 in interests in Stonecrest Realty Holdings LLC; two-year term; remainder to the Dynasty Trust.
• GRAT C — Carried Interest GRAT: Funded with $38,000,000 in carried-interest positions in Caldwell Ridgeline Capital Funds IV, V, and VI; two-year term; remainder to the Dynasty Trust.
Because these are zeroed-out GRATs, the annuity payments are calibrated so that the remainder interest has a gift tax value of zero (or as close to zero as practicable). The GRATs therefore consume no lifetime exemption. Any appreciation on the GRAT assets in excess of the IRC § 7520 rate passes to the Dynasty Trust free of transfer tax.
Caldwell Family Dynasty Trust. A Delaware-situs dynasty trust established on April 1, 2023, with Thomas R. Caldwell and Northgate Trust Company of Delaware serving as co-trustees. The Dynasty Trust was initially funded with $5,000,000 in cash from Mr. Caldwell, a taxable gift applied against his lifetime exemption. The Dynasty Trust is designed to hold assets for multiple generations, taking advantage of Delaware's abolition of the common-law rule against perpetuities, and is intended to be a "GST-exempt" trust through allocation of Mr. Caldwell's generation-skipping transfer tax exemption.
The Caldwell Family Foundation. A private non-operating foundation initially funded with $10,000,000 in cash and publicly traded securities. The foundation provides Mr. and Mrs. Caldwell with current income tax deductions, accomplishes their philanthropic objectives, and modestly reduces the gross estate by the amount of the charitable contribution, though the foundation does not directly reduce estate tax on assets passing to heirs.
Amended and Restated Caldwell Revocable Trust. The Caldwell Revocable Trust, originally established on October 3, 2010, was amended and restated effective April 1, 2023, to incorporate credit shelter trust and marital QTIP trust provisions. At Mr. Caldwell's death, the Revocable Trust is funded with assets up to the federal estate tax exemption amount into the credit shelter trust (which is not included in Mrs. Caldwell's estate) and the balance into the marital QTIP trust (qualifying for the unlimited marital deduction, thereby deferring estate tax until Mrs. Caldwell's death).
The ILIT proceeds are intended to complement — not substitute for — the tax savings achieved through the GRATs, the Dynasty Trust, and the Foundation. Even in a scenario where the GRATs and Dynasty Trust perform as projected and transfer $60,000,000 to $75,000,000 out of the taxable estate, the remaining estate tax liability will be substantial, and the ILIT's $15,000,000 death benefit provides critical liquidity to address that obligation.
III. Trust Structure and Key Terms
A. Trust Agreement
The principal terms of the ILIT are as follows:
The trust agreement was drafted by Calderwood & Harkness LLP and reviewed by the trustee's counsel, Ridgewell & Thorn LLP (Margaret A. Colvin, Esq.). The trust agreement was executed by Mr. Caldwell as grantor and accepted by Northgate Trust Company of Delaware as trustee on March 15, 2023. Copies of the executed trust agreement have been delivered to Mr. Caldwell, Northgate Trust Company of Delaware, and Calderwood & Harkness LLP's files.
B. Trustee
The sole trustee of the ILIT is Northgate Trust Company of Delaware, a Delaware-chartered trust company. The primary administrative contact at Northgate is Philip A. Rossiter, Senior Vice President, Trust Administration, whose office is located at 1201 North Market Street, Suite 1600, Wilmington, Delaware 19801.
The selection of an independent institutional trustee — rather than a family member or close advisor — was deliberate and is driven by two critical considerations:
First, the use of an institutional trustee eliminates concerns regarding "incidents of ownership" under IRC § 2042. If a family member who is related or subordinate to the grantor were to serve as trustee, the IRS could argue that the grantor effectively retained constructive ownership of the policy through the related-party trustee, thereby causing the policy proceeds to be included in the grantor's gross estate. The appointment of an independent, unrelated institutional trustee forecloses this argument.
Second, an institutional trustee provides continuity, professional administration, and fiduciary accountability over what is expected to be a long-term trust. Given that the death benefit on this second-to-die policy will not be payable until the death of the surviving insured — potentially decades from now — it is important that the trustee be an entity that will endure and that has the institutional infrastructure to carry out the trust's administrative requirements, including timely Crummey notice delivery, premium payment, policy monitoring, and eventual death benefit collection and distribution.
Northgate Trust Company of Delaware also serves as the institutional co-trustee of the Caldwell Family Dynasty Trust, which facilitates administrative coordination between the two trusts. Having a common institutional trustee across both structures simplifies communication and reduces the risk of administrative lapses.
Northgate's outside counsel for trust matters is Ridgewell & Thorn LLP, with Margaret A. Colvin, Esq. serving as the primary contact. Ms. Colvin's office is located at 1000 North King Street, Suite 300, Wilmington, Delaware 19801.
C. Beneficiaries
The beneficiary designations under the ILIT are structured in two tiers:
Primary Beneficiaries (Crummey Beneficiaries). The three adult children of Jonathan R. Caldwell and Eleanor V. Caldwell are the primary beneficiaries and hold Crummey withdrawal rights with respect to contributions to the ILIT:
1. Thomas R. Caldwell, 55 Perry Street, Unit 3, New York, New York 10014.
2. Katherine C. Hartfield, 210 Briarcliff Lane, Greenwich, Connecticut 06830.
3. Olivia G. Caldwell, 1240 North Dearborn Street, Apt. 807, Chicago, Illinois 60610.
Contingent Beneficiaries. The issue of each primary beneficiary, per stirpes, serve as contingent beneficiaries. The current contingent beneficiaries include James W. Hartfield, Charlotte M. Hartfield, Lucas T. Caldwell, and Nora E. Caldwell, as well as any future-born issue of the primary beneficiaries.
Upon the death of the second insured and the collection of the $15,000,000 death benefit, the trustee is directed to distribute the proceeds in accordance with the distribution provisions of the trust agreement. The trust agreement provides for distribution in equal shares among the three children, or, if any child has predeceased the second insured, that child's share passes to his or her issue, per stirpes.
D. Trust Property
The sole asset of the ILIT is a second-to-die universal life insurance policy issued by Beacon Life Assurance Company, a Connecticut-domiciled insurance company with principal offices at 100 Constitution Plaza, Hartford, Connecticut 06103.
The policy details are as follows:
The policy was procured through Glenmore Insurance Brokerage LLC, a licensed insurance brokerage specializing in high-net-worth private clients. The primary contact at Glenmore is Nathan C. Freed, Senior Vice President, Private Client Division, located at 44 Wall Street, Suite 1200, New York, New York 10005. Mr. Freed coordinated the underwriting process, secured competitive quotes from multiple carriers, and recommended the Beacon Life policy based on the carrier's financial strength ratings, the competitiveness of the premium structure, and the flexibility of the universal life chassis.
Assignment of Policy. Jonathan R. Caldwell was listed as the initial applicant for the policy. Simultaneously with the issuance of the policy on March 15, 2023, Mr. Caldwell executed an Assignment of Life Insurance Policy (the "Assignment Instrument"), irrevocably transferring all ownership rights, title, and interest in the policy to Northgate Trust Company of Delaware, as trustee of the Caldwell Family Insurance Trust. The Assignment Instrument was delivered to Beacon Life Assurance Company, which acknowledged receipt of the assignment and updated its records to reflect Northgate Trust Company of Delaware as the policy owner and the payee of the death benefit. A copy of the acknowledged Assignment Instrument has been retained in the ILIT administrative file maintained by Northgate and in the Calderwood & Harkness LLP matter file.
E. Irrevocability and Incidents of Ownership
The irrevocability of the ILIT is a foundational structural requirement. The trust instrument provides that the trust is irrevocable from the date of its execution on March 15, 2023. Jonathan R. Caldwell has retained no power — whether express, implied, or constructive — to alter, amend, revoke, or terminate the trust or any of its terms. Mr. Caldwell does not serve as trustee, co-trustee, investment advisor, or distribution advisor of the ILIT, and he holds no veto power over trustee decisions.
With respect to the Beacon Life policy specifically, Mr. Caldwell retains no "incidents of ownership" within the meaning of IRC § 2042(2). The regulations under § 2042 define incidents of ownership broadly to include the power to change beneficiaries, the power to surrender or cancel the policy, the power to assign the policy, the power to pledge the policy as collateral, the power to borrow against the policy's cash value, and any reversionary interest exceeding 5% of the value of the policy immediately before the insured's death. Following the execution of the Assignment Instrument on March 15, 2023, all such powers and rights are vested exclusively in Northgate Trust Company of Delaware as trustee. Mr. Caldwell has no ability to exercise any of these powers directly or indirectly.
Eleanor V. Caldwell similarly retains no incidents of ownership in the policy. While she is an insured life under the policy, she is not an owner, a beneficiary of the policy (as distinct from a beneficiary of the trust), a trustee, or a holder of any policy ownership rights. Mrs. Caldwell's status as an insured life does not, in and of itself, give rise to incidents of ownership. See Treas. Reg. § 20.2042-1(c)(2).
The absence of incidents of ownership in both Mr. and Mrs. Caldwell is critical to ensuring that the $15,000,000 death benefit is not included in either spouse's gross estate under IRC § 2042, subject to the three-year lookback rule under IRC § 2035 discussed in Section VI below.
IV. Insurance Policy Details
A. Policy Type and Carrier
The policy held by the ILIT is a second-to-die (survivorship) universal life insurance policy. A second-to-die policy insures two lives under a single policy and pays the death benefit only upon the death of the second insured to die. This structure is particularly well-suited for estate planning purposes because federal estate tax is typically deferred until the death of the surviving spouse through the use of the unlimited marital deduction (IRC § 2056), and therefore the estate tax liquidity need does not arise until the second death.
The policy was issued by Beacon Life Assurance Company, a Connecticut-domiciled life insurance company with its principal offices at 100 Constitution Plaza, Hartford, Connecticut 06103. Beacon Life is rated "A+" (Superior) by A.M. Best Company, "AA-" by Standard & Poor's, and "Aa3" by Moody's Investors Service, reflecting strong financial strength and claims-paying ability. The selection of Beacon Life was based on the carrier's financial stability, the competitiveness of its premium structure relative to comparable carriers, and the favorable terms of its universal life product, including flexible premium payment options and competitive credited interest rates on the policy's cash value account.
The policy number is BLA-2023-77419.
B. Death Benefit
The face amount and death benefit of the policy is $15,000,000. This death benefit is payable to the policy owner — Northgate Trust Company of Delaware, as trustee of the ILIT — upon the death of the second to die of Jonathan R. Caldwell and Eleanor V. Caldwell.
The $15,000,000 death benefit was determined based on a comprehensive analysis of Mr. Caldwell's projected estate tax liability, the anticipated estate tax reduction from the GRAT, dynasty trust, and foundation strategies, the composition and liquidity profile of the estate, and the premium affordability within the gift tax annual exclusion and lifetime exemption framework. While the death benefit does not cover the entirety of the projected estate tax liability, it provides a significant and dedicated liquidity source that, when combined with the liquid securities in the estate, is expected to be sufficient to cover the estate tax obligation without requiring the forced sale of illiquid assets.
C. Premiums
The annual premium for the policy is $187,500. Premiums are payable on an annual basis, with the first premium having been paid at policy inception in March 2023.
The premium funding mechanics are as follows: Each year, Jonathan R. Caldwell makes a cash contribution to the ILIT in the amount of $187,500. This contribution constitutes a gift from Mr. Caldwell to the trust. Upon receipt of the contribution, the trustee issues Crummey withdrawal notices to each of the three beneficiaries (as described in detail in Section V below). After the 30-day Crummey withdrawal period has expired without exercise by any beneficiary, the trustee applies the contributed funds to pay the annual premium to Beacon Life Assurance Company.
It is important that the premium contribution be made by Mr. Caldwell directly to the ILIT, and that the trustee — not Mr. Caldwell — remit the premium payment to Beacon Life. This sequencing preserves the characterization of the premium payment as a gift from Mr. Caldwell to the trust beneficiaries (through the Crummey mechanism) rather than a direct payment of premium by Mr. Caldwell, which could be argued to constitute an incident of ownership or a retained interest in the policy.
D. Rationale for Second-to-Die Structure
The selection of a second-to-die policy structure, rather than a single-life policy on Mr. Caldwell alone, was driven by several considerations:
Lower premium cost. A second-to-die policy is significantly less expensive than a comparable single-life policy on one insured. This is because the actuarial risk to the carrier is deferred — the carrier does not pay the death benefit until both insureds have died, which, on an actuarial basis, extends the expected payout date and reduces the policy's cost. For the Caldwell ILIT, the annual premium of $187,500 for $15,000,000 in second-to-die coverage compares favorably to the estimated annual premium of approximately $310,000 to $340,000 that would have been required for a single-life policy of comparable face amount on Mr. Caldwell alone (based on his age of 67 and underwriting classification).
Alignment with estate tax timing. As noted above, the federal estate tax liability on the Caldwell estate is expected to crystallize at the death of the surviving spouse. Under the Caldwell Revocable Trust, the unlimited marital deduction will be fully utilized at the first death through the marital QTIP trust, deferring all estate tax until the second death. A second-to-die policy therefore aligns the availability of insurance proceeds with the timing of the estate tax obligation.
Maximization of death benefit per premium dollar. Because of the lower premium cost, the second-to-die structure allows the ILIT to obtain a larger death benefit for the same premium outlay, or — as in this case — a $15,000,000 death benefit at a premium level that is manageable within the annual gift tax exclusion and lifetime exemption framework.
Sufficiency of resources during Eleanor's lifetime. Mrs. Caldwell's separate assets of approximately $18,000,000, combined with the income and principal of the marital QTIP trust and the credit shelter trust under the Revocable Trust, are expected to provide sufficient resources for her support during her lifetime. The ILIT death benefit is not needed until the second death, when the estate tax liability must be funded.
V. Crummey Withdrawal Rights
A. Legal Framework — Present Interest Requirement
The federal gift tax annual exclusion under IRC § 2503(b) permits a donor to transfer up to $17,000 per donee per year (as adjusted for inflation; 2023 amount) without incurring gift tax or consuming any portion of the donor's lifetime gift tax exemption. However, this annual exclusion is available only for transfers of a "present interest" — that is, a gift that confers upon the donee an unrestricted right to the immediate use, possession, or enjoyment of the transferred property or the income therefrom.
A contribution to an irrevocable trust is ordinarily characterized as a gift of a "future interest" rather than a present interest, because the trust beneficiaries do not have a present right to possess or enjoy the contributed property. They have only a contingent or deferred right to receive distributions at the discretion of the trustee or upon the occurrence of future events. Accordingly, absent special planning, contributions to an irrevocable trust do not qualify for the gift tax annual exclusion, and each contribution consumes a corresponding portion of the donor's lifetime exemption.
The landmark case of Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), established that a beneficiary's present, legally enforceable right to withdraw trust contributions within a specified time period converts what would otherwise be a future-interest gift into a present-interest gift eligible for the annual exclusion. The rationale is that the withdrawal right gives the beneficiary an immediate and unrestricted right to possess or enjoy the contributed property — even though the beneficiary may choose not to exercise the right and may allow it to lapse.
To be effective, the Crummey withdrawal right must satisfy the following requirements:
(i) Legally enforceable right. The withdrawal right must be a bona fide, legally enforceable right under applicable state law and the terms of the trust instrument. It cannot be illusory.
(ii) Timely written notice. The beneficiary must receive timely written notice from the trustee that a contribution has been made and that the beneficiary has a right to withdraw a specified amount. Without notice, the beneficiary cannot meaningfully exercise the right, and the IRS may argue that the right is not a true present interest.
(iii) Reasonable exercise period. The withdrawal right must be exercisable for a reasonable period — typically 30 days from the date of notice. The IRS has accepted 30-day withdrawal periods as sufficient, though there is no statutory minimum. Some practitioners use 45-day or 60-day periods for additional comfort. See Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991) (upholding Crummey powers held by contingent beneficiaries where notice was given and a reasonable withdrawal period was provided).
(iv) No prearrangement. The withdrawal right must not be subject to any express or implied agreement, understanding, or side arrangement between the grantor, the trustee, and the beneficiaries that the beneficiaries will not exercise the right. Any such prearrangement would vitiate the present-interest characterization and cause the contribution to be treated as a future-interest gift. See Estate of Holland v. Commissioner, T.C. Memo. 1997-302.
B. Crummey Beneficiaries and Withdrawal Amount
The three Crummey beneficiaries under the Caldwell ILIT are Mr. Caldwell's three adult children: Thomas R. Caldwell, Katherine C. Hartfield, and Olivia G. Caldwell. Upon written notice from the trustee that a contribution has been made to the ILIT, each beneficiary has the right to withdraw up to $5,000 of the contribution.
The $5,000 per-beneficiary withdrawal amount was deliberately set at this level to stay within the "five-or-five" safe harbor of IRC § 2041(b)(2) and IRC § 2514(e). These provisions address the tax treatment of the lapse of a power of withdrawal. When a Crummey beneficiary allows a withdrawal right to lapse (i.e., does not exercise the right within the 30-day withdrawal period), the lapse is treated as a release of a general power of appointment. Under IRC § 2514(e), a release of a general power of appointment is treated as a transfer (and potentially a taxable gift) by the power holder — except to the extent the lapsed amount does not exceed the greater of $5,000 or 5% of the aggregate value of the assets from which the exercise of the lapsed power could have been satisfied.
Because the maximum withdrawal right of each beneficiary is $5,000, and the trust's total assets at the time of the lapse will be at least $187,500 (the annual contribution), 5% of the trust assets would be $9,375 — in either case, greater than or equal to the $5,000 withdrawal right. The lapse therefore falls entirely within the five-or-five safe harbor, and no beneficiary is treated as having made a taxable gift or a taxable transfer upon the lapse of the withdrawal right. This avoids the unintended consequence of converting the beneficiary into a transferor for gift or estate tax purposes.
The total annual Crummey withdrawal rights across all three beneficiaries are:
3 beneficiaries × $5,000 per beneficiary = $15,000 in total withdrawal rights per year.
C. Annual Exclusion Coverage
The 2023 gift tax annual exclusion is $17,000 per donee per year, as adjusted for inflation under IRC § 2503(b). Each beneficiary's Crummey withdrawal right of $5,000 creates a present-interest gift from Jonathan R. Caldwell to that beneficiary in the amount of $5,000. Because $5,000 is less than the $17,000 annual exclusion per donee, the full $5,000 gift to each beneficiary is covered by the annual exclusion and consumes no lifetime exemption.
However, the annual exclusion analysis must consider the entire contribution to the ILIT — not just the Crummey withdrawal portion. The annual premium contribution of $187,500 is a gift from Mr. Caldwell to the ILIT. Of that total contribution, only the portion subject to Crummey withdrawal rights — $5,000 per beneficiary, or $15,000 in total — constitutes a present-interest gift. The annual exclusion analysis is as follows:
It bears emphasis that while the annual exclusion could theoretically shelter a larger Crummey withdrawal right — up to $17,000 per beneficiary, or $51,000 in total across three beneficiaries — the withdrawal rights are intentionally limited to $5,000 per beneficiary in order to remain within the five-or-five safe harbor under IRC §§ 2041(b)(2) and 2514(e), as discussed above. This is a deliberate trade-off: a larger withdrawal right would shelter more of the premium contribution from taxable gift treatment but would expose the beneficiaries to potential gift and estate tax consequences upon the lapse of the withdrawal right in excess of the five-or-five amount.
The balance of the annual contribution — the portion in excess of the total Crummey withdrawal rights — is treated as a gift of a future interest and does not qualify for the annual exclusion. This balance must be applied against Mr. Caldwell's remaining lifetime gift tax exemption, as detailed in Section V.D below.
D. Balance of Premium — Use of Lifetime Gift Tax Exemption
The annual premium contribution to the ILIT is $187,500. Of that amount, $51,000 is sheltered by the gift tax annual exclusions (3 beneficiaries × $17,000 each). The remaining $136,500 constitutes a taxable gift that must be applied against Mr. Caldwell's remaining lifetime gift tax exemption.
The detailed calculation is as follows:
Annual premium contribution: $187,500 Less: Annual exclusion coverage (3 × $17,000): ($51,000) Taxable gift portion of premium: $136,500 per year
The effect of this annual taxable gift on Mr. Caldwell's remaining lifetime exemption is tracked below:
With $1,033,500 of lifetime exemption remaining after the first-year ILIT premium gift, the exemption can absorb the taxable portion of ILIT premium gifts for approximately seven to eight additional years ($136,500 per year) before any actual gift tax would become due. This analysis assumes no increase in the federal lifetime exemption amount. Under current law, the exemption is indexed for inflation and may increase in future years, which would extend the period during which ILIT premiums can be paid without triggering actual gift tax liability.
It is important to note that the three GRAT funding transfers are zeroed-out and produce zero taxable gifts; they do not consume any lifetime exemption. The GRAT annuity payments are structured so that the present value of the retained annuity equals the value of the property transferred to the GRAT, resulting in a remainder interest with a gift tax value of zero (or as close to zero as mathematically achievable using the IRC § 7520 rate).
We will continue to monitor Mr. Caldwell's cumulative taxable gift history and remaining lifetime exemption on an annual basis to ensure that ILIT premium contributions do not inadvertently trigger actual gift tax liability. If the remaining exemption becomes depleted, we will evaluate alternatives including (i) split-gift treatment under IRC § 2513 (if Eleanor V. Caldwell consents to gift-splitting), (ii) modification of the premium amount if the policy's performance permits reduced contributions, or (iii) other premium funding strategies.
E. Crummey Notice Procedures
The Crummey notice process is the administrative backbone of the ILIT's gift tax planning strategy. The integrity of the annual exclusion treatment depends entirely on the timely and proper delivery of Crummey withdrawal notices to each beneficiary. Any failure in the notice process could jeopardize the annual exclusion for the affected year and convert the entire premium contribution into a taxable gift consuming additional lifetime exemption.
The required notice procedures are as follows:
Trigger. Upon each annual premium contribution by Jonathan R. Caldwell to the ILIT, the trustee (Northgate Trust Company of Delaware) must promptly send a written Crummey withdrawal notice to each of the three beneficiaries.
Timing. The notice must be sent promptly upon the trustee's receipt of the contribution. Best practice — and the standard we have instructed Northgate to follow — is to send the notice within one to three business days of the trustee's receipt of the contribution to the ILIT. While there is no specific statutory deadline for Crummey notice delivery, courts and the IRS have emphasized the importance of promptness. A notice sent weeks or months after the contribution, or after the premium has already been paid, would undermine the beneficiary's ability to exercise the withdrawal right and could cause the IRS to disregard the withdrawal right as illusory.
Content of Notice. Each Crummey withdrawal notice must inform the beneficiary of the following:
(i) That a contribution has been made to the Caldwell Family Insurance Trust.
(ii) That the beneficiary has the right to withdraw up to $5,000 of the contribution.
(iii) That the withdrawal right expires 30 calendar days from the date of the notice.
(iv) That if the beneficiary does not exercise the withdrawal right within the 30-day period, the right will automatically lapse, and the trustee will apply the contributed funds (along with the remainder of the contribution) to the payment of the life insurance premium.
The notice should also identify the amount of the contribution, the date of the contribution, and provide contact information for the trustee so that the beneficiary can exercise the withdrawal right if he or she chooses to do so.
Delivery Method. The notice should be sent by the trustee in writing to each beneficiary at his or her address of record. While there is no statutory requirement for any particular method of delivery, we strongly recommend that notices be sent by certified mail, return receipt requested, to create a documentary record of the mailing date and the beneficiary's receipt. The addresses of record for the three beneficiaries are as follows:
• Thomas R. Caldwell: 55 Perry Street, Unit 3, New York, New York 10014
• Katherine C. Hartfield: 210 Briarcliff Lane, Greenwich, Connecticut 06830
• Olivia G. Caldwell: 1240 North Dearborn Street, Apt. 807, Chicago, Illinois 60610
If any beneficiary changes his or her address, the trustee's records should be promptly updated and future notices sent to the new address.
Form Notice. A form Crummey withdrawal notice template has been prepared by Calderwood & Harkness LLP and provided to Northgate Trust Company of Delaware for use in connection with each annual contribution. This form notice is included as a companion document to this memorandum (see companion document: ILIT — Form Crummey Withdrawal Notice).
Record-Keeping. The trustee must maintain a complete and orderly file of all Crummey notices sent, including:
• Copies of each notice sent to each beneficiary
• The date of mailing
• The method of delivery (certified mail, return receipt, etc.)
• Copies of return receipts or other proof of delivery
• The date of expiration of each 30-day withdrawal period
• Any correspondence from beneficiaries regarding the withdrawal rights (including any exercise of the right, though exercise is not expected)
These records should be retained for at least the statute of limitations period applicable to the gift tax return reporting the contribution. The general statute of limitations for gift tax purposes is three years from the filing date of Form 709, or six years if there has been an omission of reported gifts exceeding 25% of the total amount of gifts stated on the return. We recommend that Northgate retain Crummey notice records indefinitely, as the IRS may challenge annual exclusion treatment in the context of an estate tax audit, which may occur many years after the gift tax return was filed.
Beneficiary Expectation. It is expected — though critically, it is not formally agreed upon, stipulated, or conditioned — that the beneficiaries will not exercise the withdrawal rights and will allow them to lapse. Each of the three beneficiaries has been separately advised of the existence and purpose of the Crummey withdrawal rights. However, there must be no binding agreement, express or implied, between the grantor, the trustee, and the beneficiaries that the withdrawal rights will not be exercised. Any such understanding — whether documented or undocumented — would vitiate the present-interest characterization of the Crummey gifts and cause the annual exclusion to be disallowed. See Estate of Holland v. Commissioner, T.C. Memo. 1997-302; Rev. Rul. 81-7, 1981-1 C.B. 474. If any beneficiary inquires about whether it is "expected" that they will not exercise the right, the trustee should respond neutrally, confirming the beneficiary's absolute right to exercise or not exercise the withdrawal right in his or her sole discretion.
VI. Three-Year Lookback Rule — IRC § 2035
A. Overview of the Rule
Under IRC § 2035(a), if a decedent makes a transfer of an interest in property — or relinquishes a power with respect to property — within three years of the date of the decedent's death, and the transferred property (or the property subject to the relinquished power) would have been included in the decedent's gross estate under IRC §§ 2036, 2037, 2038, or 2042 had the transfer or relinquishment not been made, then the property is included in the decedent's gross estate as though the transfer had not occurred.
This provision is of particular importance in the context of life insurance planning. Under IRC § 2042, the proceeds of a life insurance policy are included in the gross estate of a decedent who held "incidents of ownership" in the policy at the time of death. When a policy owner transfers ownership of a policy to an irrevocable trust (or otherwise relinquishes incidents of ownership), the transfer removes the policy from the transferor's estate — but only if the transferor survives the transfer by more than three years. If the transferor dies within three years of the transfer, IRC § 2035(a) "pulls back" the policy proceeds into the transferor's gross estate, as if the transfer had never been made.
The rationale for this rule is to prevent deathbed transfers of life insurance policies — i.e., transfers made in contemplation of imminent death to remove the policy proceeds from the taxable estate. By imposing a three-year waiting period, the statute ensures that the estate tax benefits of the transfer are not available unless the transfer was made with sufficient advance planning.
B. Application to the Caldwell ILIT
The Beacon Life policy, Policy No. BLA-2023-77419, was acquired and assigned to the ILIT on March 15, 2023. Under the § 2035 three-year lookback rule, the policy proceeds could be included in Jonathan R. Caldwell's gross estate if Mr. Caldwell dies within three years of the assignment — that is, before March 15, 2026 — under circumstances in which the death benefit becomes payable at his death.
The analysis is somewhat more nuanced for a second-to-die policy than for a single-life policy, because the death benefit is not payable upon the first death of the two insureds. The following scenario analysis illustrates the interaction of the § 2035 lookback rule with the second-to-die policy structure:
Scenario 1: Jonathan dies before March 15, 2026, but Eleanor survives. In this scenario, no death benefit is payable at Jonathan's death because the policy is a second-to-die policy and Eleanor is still living. The policy remains in force within the ILIT. Because no death benefit is payable, there are no policy proceeds to be included in Jonathan's estate under § 2042 or § 2035. The three-year lookback rule is inapplicable because the triggering event for § 2042 inclusion — the payment of death benefit proceeds — has not occurred. Upon Eleanor's subsequent death (which necessarily will be more than three years after the March 15, 2023 assignment), the death benefit will be paid to the ILIT and will be outside both Jonathan's and Eleanor's taxable estates.
Scenario 2: Eleanor dies first, and Jonathan subsequently dies within three years of the assignment (before March 15, 2026). In this scenario, Eleanor's prior death converts the second-to-die policy into what is effectively a single-life policy on Jonathan's remaining life. When Jonathan then dies within three years of the assignment, the death benefit of $15,000,000 becomes payable. Because Jonathan would have held incidents of ownership in the policy immediately before his death but for the assignment to the ILIT, and because the assignment occurred within three years of Jonathan's death, § 2035(a) would pull the $15,000,000 death benefit back into Jonathan's gross estate. This is the scenario of greatest concern.
Scenario 3: Jonathan and Eleanor die simultaneously within three years of the assignment. Under the Uniform Simultaneous Death Act (as adopted in Delaware and New York), if both insureds die simultaneously and neither can be established to have survived the other, the death benefit would be payable (assuming the policy treats simultaneous death as triggering the benefit). In this scenario, the § 2035 inclusion risk exists, as the death benefit becomes payable within three years of the assignment.
Scenario 4: Jonathan survives past March 15, 2026 (regardless of whether Eleanor is then living or deceased). Once the three-year lookback period has expired, IRC § 2035(a) no longer applies to the policy assignment. The $15,000,000 death benefit is definitively excluded from Jonathan's gross estate, regardless of when he subsequently dies. This is the target outcome of the planning.
Distinction Between Transfer and Acquisition. It warrants mention that some authorities have drawn a distinction between the "transfer" of an existing policy from the insured to an ILIT (which clearly triggers the three-year lookback) and the "acquisition" of a new policy by a trust from the outset (where the trust is the original applicant and owner and the insured never holds incidents of ownership). In theory, if the trust independently applies for and acquires a policy, the insured has never held incidents of ownership and therefore has never "transferred" any interest to the trust, meaning § 2035 should not apply. However, in the present case, Jonathan R. Caldwell was listed as the initial applicant for the policy, and the policy was simultaneously assigned to the ILIT. The IRS has not consistently recognized a distinction between initial application by the insured with simultaneous assignment and initial application by the trust, and courts have treated functionally equivalent arrangements similarly for § 2035 purposes. The conservative and safer position — which we adopt for purposes of this analysis — is to treat the three-year clock as running from the assignment date of March 15, 2023, regardless of whether the arrangement is characterized as a "transfer" or an "acquisition."
Risk Assessment. Given Jonathan R. Caldwell's current age of 67 and his apparent good health (as evidenced by his qualification for insurability and favorable underwriting classification for the Beacon Life policy), the risk that he will die within the three-year lookback period is manageable but not negligible. Actuarially, the probability of death for a 67-year-old male in standard health within a three-year period is approximately 5% to 8%, depending on the mortality table used. The three-year lookback window expires on March 15, 2026.
C. Planning Considerations and Mitigation
Several factors mitigate the risk and impact of a potential § 2035 inclusion:
Overall plan effectiveness. The estate plan as a whole — including the three GRATs, the Dynasty Trust, and the Foundation — is projected to reduce the taxable estate by approximately $60,000,000 to $75,000,000. Even if the ILIT death benefit were pulled back into the estate under § 2035, the overall plan still achieves very significant estate tax savings. The ILIT is a valuable but not indispensable component of the broader plan.
Time-based mitigation. The most effective mitigation strategy is simply the passage of time. If Jonathan R. Caldwell survives past March 15, 2026, the three-year lookback period expires and the § 2035 risk is permanently eliminated. We recommend that the ILIT administrative team monitor this date and flag it as a milestone in the estate planning timeline.
Second-to-die structure as a natural hedge. As illustrated in Scenario 1 above, the second-to-die structure provides a natural hedge against the § 2035 risk in many factual scenarios. So long as Eleanor survives Jonathan (the most actuarially likely scenario given their respective ages of 64 and 67), no death benefit is payable at Jonathan's death and no § 2035 inclusion occurs. The § 2035 risk materializes only in the less likely scenario in which Eleanor predeceases Jonathan and Jonathan then dies within the three-year period, or in the case of simultaneous death within the three-year period.
Premium gifts and § 2035(b). IRC § 2035(b) provides a separate rule that adds back to the gross estate any gift tax actually paid by the decedent (or the decedent's estate) on gifts made within three years of death. This provision is not applicable to the Caldwell ILIT because no actual gift tax is being paid on the premium contributions — all premium gifts are within the annual exclusion and lifetime exemption amounts. Accordingly, § 2035(b) does not increase the estate tax exposure.
Alternative structure considered and rejected. During the planning process, we considered having the ILIT itself apply for and own the policy from inception, with Northgate Trust Company of Delaware (as trustee) designated as the applicant and initial owner. This "trust-applied-for" approach could, in theory, have avoided the § 2035 issue entirely by ensuring that Jonathan R. Caldwell never held incidents of ownership. Ultimately, however, this approach was rejected for practical reasons: Beacon Life's application process required an individual applicant for underwriting purposes, and the simultaneous assignment approach was deemed functionally equivalent from both an underwriting and a tax perspective. As noted above, the conservative position is to treat the three-year clock as running from the assignment date.
VII. Gift Tax Reporting — Premium Contributions
A. Annual Reporting on Form 709
Each year's premium contribution to the ILIT must be reported on the Federal Gift Tax Return, IRS Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return), filed by Jonathan R. Caldwell. The reporting is required regardless of whether any actual gift tax is due, because the contribution includes a taxable gift component that is being applied against the lifetime exemption.
The reporting on Form 709 is structured as follows:
Annual exclusion gifts. The $51,000 portion of the premium contribution covered by the annual exclusions (3 beneficiaries × $17,000 per beneficiary) is reported on Schedule A of Form 709 as gifts to the three Crummey beneficiaries qualifying for the annual exclusion under IRC § 2503(b). Each beneficiary's gift is listed separately as a present-interest gift in the amount of $17,000 (the maximum annual exclusion available per donee, not merely the $5,000 Crummey withdrawal amount, as the annual exclusion shelters the full $17,000 of the gift attributable to each beneficiary's interest in the trust contribution).
Taxable gift portion. The remaining $136,500 ($187,500 total contribution minus $51,000 annual exclusion coverage) is reported as a taxable gift on Schedule A. This amount is carried to the computation section of the return and applied against Mr. Caldwell's remaining applicable exclusion amount (lifetime exemption). No actual gift tax is due so long as the cumulative total of Mr. Caldwell's lifetime taxable gifts — including prior gifts of $6,750,000, the Dynasty Trust gift of $5,000,000, and the annual ILIT premium taxable gift of $136,500 — remains within the applicable exclusion amount.
Filing deadline. Form 709 is due on April 15 of the year following the calendar year in which the gifts are made (or on the extended filing date if an extension is obtained). For the 2023 premium contribution, the Form 709 will be due on April 15, 2024 (or October 15, 2024 if extended).
Coordination. Sylvia Hartwell of Calderwood & Harkness LLP (Specialist Partner, Tax) and Martin J. Prescott, CPA, of Strathmore Corporation & Greaves LLP (600 Third Avenue, 28th Floor, New York, New York 10016) will coordinate on the preparation and filing of Form 709 for 2023 and all subsequent years in which ILIT premium contributions are made. Mr. Prescott's firm serves as Mr. Caldwell's personal tax advisor and prepares his annual income tax returns. It is important that Form 709 reporting of the ILIT contributions be integrated with the broader gift tax reporting for the year, including any other gifts made by Mr. Caldwell (e.g., annual exclusion gifts to children and grandchildren, charitable gifts, and other transfers).
B. GST Exemption Considerations
The generation-skipping transfer ("GST") tax is an additional transfer tax imposed under IRC §§ 2601–2664 on transfers to "skip persons" — generally, beneficiaries who are two or more generations below the transferor (e.g., grandchildren). Each individual is allocated a GST exemption (equal to the basic exclusion amount — $12,920,000 in 2023) that can be allocated to trusts to exempt them from the GST tax.
The ILIT is a "skip person" trust to the extent that grandchildren or more remote descendants are beneficiaries. In the case of the Caldwell ILIT, the primary Crummey beneficiaries are Thomas, Katherine, and Olivia — all of whom are Mr. Caldwell's children and therefore "non-skip persons." The trust distribution provisions direct the death benefit proceeds primarily to the three children in equal shares. However, the contingent beneficiary provisions provide that if any child predeceases the second insured, that child's share passes to his or her issue, per stirpes. To the extent distributions may ultimately be made to grandchildren under these contingent provisions, the ILIT may be subject to the GST tax unless GST exemption has been allocated to the trust.
Our current assessment is that GST exemption allocation to the ILIT is not anticipated to be necessary in the ordinary course, because the primary distribution is to non-skip persons (the three children). However, the contingent per stirpes provisions create a theoretical possibility of GST-taxable distributions, and a protective GST exemption allocation may be warranted.
Additionally, the automatic GST allocation rules under IRC § 2632(c) may apply to the ILIT contributions. Under § 2632(c), an individual's GST exemption is automatically allocated to any "indirect skip" — a transfer to a trust that could have a GST-taxable distribution or termination. If the ILIT qualifies as a trust subject to the automatic allocation rules, GST exemption may be automatically allocated to ILIT contributions unless Mr. Caldwell affirmatively elects out of the automatic allocation on his Form 709.
Recommendation. We recommend consulting with Sylvia Hartwell regarding whether to (i) affirmatively allocate GST exemption to the ILIT contributions, (ii) rely on the automatic allocation rules and confirm that they apply, or (iii) elect out of the automatic allocation on the Form 709 to preserve GST exemption for other trusts (such as the Dynasty Trust, which is specifically designed for GST-exempt treatment). Given Mr. Caldwell's limited remaining GST exemption (his GST exemption is reduced by the same prior taxable gifts and Dynasty Trust funding that reduce his lifetime gift tax exemption), the allocation decision should be made with care and in the context of the overall estate plan.
VIII. Administrative Requirements and Ongoing Obligations
A. Annual Premium Payment Procedures
The annual administration of the ILIT centers on the premium contribution and Crummey notice cycle. Each year, the following steps must be completed in sequence:
Step 1: Cash Contribution by the Grantor. Jonathan R. Caldwell makes a cash contribution to the ILIT in the amount of $187,500. The contribution should be made by wire transfer or check payable to "Northgate Trust Company of Delaware, Trustee of the Caldwell Family Insurance Trust." The contribution should be made sufficiently in advance of the premium due date to allow for the 30-day Crummey withdrawal period and the trustee's processing time. We recommend that the contribution be made at least 45 to 50 days before the annual premium due date.
Step 2: Crummey Withdrawal Notices. Within one to three business days of receipt of the contribution, Northgate Trust Company of Delaware sends a written Crummey withdrawal notice to each of the three beneficiaries (Thomas, Katherine, and Olivia) by certified mail, return receipt requested, to their respective addresses of record.
Step 3: 30-Day Withdrawal Period. The 30-day withdrawal period runs from the date of each notice. During this period, each beneficiary has the absolute right to demand a distribution of up to $5,000 from the trust. No premium payment should be made to Beacon Life during this period.
Step 4: Lapse of Withdrawal Rights. If no beneficiary exercises the withdrawal right within the 30-day period (as is expected), the withdrawal rights automatically lapse and the trustee is free to apply the contributed funds to the payment of the annual premium.
Step 5: Premium Payment. After the 30-day withdrawal period has expired without exercise, Northgate Trust Company of Delaware remits the $187,500 premium payment to Beacon Life Assurance Company.
An annual premium funding letter template has been prepared by Calderwood & Harkness LLP and will be provided to Mr. Caldwell each year as a reminder of the timing and procedures required. This letter is included as a companion document to this memorandum (see companion document: ILIT — Annual Premium Funding Letter).
B. Trustee Responsibilities
Northgate Trust Company of Delaware, as sole trustee of the ILIT, bears the following ongoing fiduciary and administrative responsibilities:
• Receiving and holding premium contributions. The trustee must maintain a segregated trust account for the ILIT and deposit all contributions from Mr. Caldwell into that account.
• Issuing Crummey withdrawal notices. The trustee must prepare and send timely, written Crummey withdrawal notices to all three beneficiaries following each contribution, in accordance with the procedures described in Section V.E above.
• Paying premiums to Beacon Life. After the expiration of the Crummey withdrawal period, the trustee must remit the annual premium to Beacon Life Assurance Company in full and on time to avoid any lapse or default on the policy.
• Maintaining records. The trustee must maintain complete records of all contributions received, Crummey notices sent (including dates, delivery method, and proof of delivery), premium payments made, and any correspondence with beneficiaries, the grantor, the insurance carrier, or the insurance broker.
• Filing trust tax returns. If the ILIT generates any taxable income (e.g., interest on cash balances held in the trust account between contribution and premium payment), the trustee must file any required trust income tax returns (Form 1041 or applicable state returns). In most years, the ILIT will have minimal or no taxable income, as contributions are typically applied to premium payments promptly after the Crummey withdrawal period expires.
• Collecting and distributing death benefit proceeds. Upon the death of the second insured, the trustee must promptly file a claim with Beacon Life for the $15,000,000 death benefit, collect the proceeds, and distribute them to the trust beneficiaries in accordance with the trust agreement's distribution provisions.
• Coordinating with advisors. The trustee should coordinate as needed with Calderwood & Harkness LLP (legal counsel to the grantor), Havensbrook Wealth Advisors LLC (financial advisor), Strathmore Corporation & Greaves LLP (tax advisors and accountants), and Glenmore Insurance Brokerage LLC (insurance broker).
C. Policy Monitoring
Havensbrook Wealth Advisors LLC (Diana R. Linden, CFP®, Managing Director, Family Office Services, 900 Third Avenue, 18th Floor, New York, New York 10022) has been engaged to conduct periodic reviews of the Beacon Life policy's performance, including the following:
• Cash value accumulation. Monitoring the policy's internal account value to ensure that the universal life policy is accumulating sufficient cash value to sustain the policy through the projected coverage period.