Individuals who own life insurance policies should examine various methods to remove the death benefits payable under their life insurance policies from their taxable estate for estate tax purposes. One attractive solution is the utilization of an irrevocable trust to own the life insurance policy and provide management of the proceeds from the life insurance policy for the benefit of the surviving spouse and other heirs. When utilizing a single life insurance policy that is intended to benefit your surviving spouse, the irrevocable trust can operate in a manner similar to the credit shelter trust whereby the surviving spouse enjoys the economic benefit of the life insurance proceeds while sheltering them from estate taxes upon the subsequent death of the surviving spouse. There is no limitation on the amount of life insurance proceeds that you can prevent from being subjected to estate taxes.
The irrevocable trust can leverage the number of gifts that can be made on a tax-free basis for the benefit of subsequent generations of beneficiaries and can also operate to minimize the imposition of generation-skipping transfer taxes.
Irrevocable trusts can also be utilized to provide a trust fund for the education of a child or grandchild while operating to reduce federal income taxes on the earnings of the trust.
Certain complex irrevocable trusts, such as grantor-retained income trusts, grantor- retained annuity trusts and grantor-retained unitrusts can provide estate tax savings by reducing the deemed value of gifts made to children and grandchildren.