WealthDocs ILIT - What's so special about February 1st?

Query: So I'm reading my WealthDocs ILIT and I see a reference to February 1 in the trust. I think this has something to do with "hanging" Crummey powers, but I don't get it.

Response: Believe it or not, that's a fairly technical and involved question. Recall that with "hanging powers," we want those hanging amounts to lapse to the greatest amount possible as soon as possible. For a more complete discussion on hanging Crummey powers, see the previous blog post on that topic. Here's how the hanging powers work in the context of the February 1 lapse date: 

Assume a $12,000 contribution is made to the trust in year 1. With a hanging power, the first $5,000 lapses after the initial Crummey withdrawal right term (assume the trust gives a 30 day withdrawal right). 

 

The remaining $7,000 (the amount of the contribution that exceeds the greater of $5,000 or 5% of the trust) "hangs around" and remains subject to a right to withdraw. On February 1 of the following year, (we have a "new year," and hence a new 5/5 that can lapse), the amount of the hanging power lapses, again to the greater of $5,000 or 5% of the trust. So on February 1, $5,000 of the hanging power lapses, leaving only $2,000 "hanging." Another contribution is made to the trust in year two, and we start the process again, gradually increasing the amount that "hangs." 

The reason WealthDocs makes the hanging power lapse as soon as possible in year two is to limit the value exposed to the beneficiary's continuing right to withdraw. We let the greatest amount of the hanging power lapse as quickly as possible in the following year. We set that date at February 1 to make sure that we have at least 30 days from year end to contemplate any gifts made to the trust on December 31 of the previous year.
Matthew T. McClintock, JD http://www.wealthcounsel.com/