In this section: Keeping your life insurance out of your estate. Leveraging your gifts. A different spin on gifting. Keeping your life insurance from increasing your taxes. The Life Insurance Trust has a pretty daunting and unappealing name for what is in reality a very good way to reduce or eliminate the effect of estate taxes on larger estates. Lets face it though, most of us don't like the concept of life insurance. It often takes the slickest of salesmen to get us to buy it in the first place only to cancel the policy a few years later. An informal poll of my clients shows that life insurance is on the bottom of their lists when it comes to planning their estates. In larger estates though where estate taxes are a factor, a life insurance trust can be used to great advantage. When planning for larger estates avoiding the specter of estate taxes is the primary goal. The first step is usually to advise the client of the prospect of gifting. Gifting amounts out to the heirs sufficient amounts to keep the estate below $600,000. (Remember that this amount will be adjusted upward each year over the next ten years.) If the use of an "AB" credit shelter trust is not sufficient to eliminate estate taxes we use an annual gifting program. For many clients gifting is sufficient to keep them below the tax threshold. Other clients, however, do not like the idea of gifting their assets while they are alive while others may have an estate too large for gifting to be able to make a dent in its overall size. The next step in the estate planning hierarchy of complexity is to use the life insurance trust. Life insurance benefits pass to the beneficiary on death income tax free, BUT if you own the life insurance policy when you die your estate pay estate taxes on the total amount given to your beneficiary. In larger estates that would in effect reduce the value of the policy by half due to the amount of tax due the government. You can have your children own the policy, making gifts to them each year under the annual gift exclusion to pay the annual premium. Most clients however opt for a trust to own the policy instead. This trust is called a life insurance trust. The life insurance trust solves the problem of ownership by removing the value of the policy from being included in your estate and therefore removing the assets from exposure to estate taxes. Leveraging your gifts. The two most common uses for the insurance proceeds are to either pay estate taxes due or to pay the proceeds directly to your heirs depending of the individuals particular situation and desires. The life insurance trust differs significantly from the common revocable living trust. For starters its "irrevocable" which means that once it is created it can not be changed. Secondly you generally can not be the trustee of the trust, nor retain any powers to control the assets within the trust. Yikes! that sounds pretty onerous. Not to fear though when it all comes together the life insurance trust works to protect your estate from taxes while keeping the assets under your watchful eye. A different spin on gifting.<. So you find yourself with enough assets that when you die your estate will be subject to estate taxes. You do not want to just give the money away to your kids while you are alive using the 10,000.00 a year gift exclusion. Besides, you are too far over the $600,000 limit any way. A life insurance trust solves this dilemma. It comes to our rescue by allowing you to make the gift, but instead of it going directly to the recipient, it goes to the life insurance trust in their name. They then have 30 days to claim it before it is used to purchase a life insurance policy on your life. Why life insurance? Life insurance is used to leverage, or multiply the effectiveness of your dollar. It in effect shifts the risk of your death to the insurance company. The diagram below illustrates how an income trust works.

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