A common estate planning strategy is to create an irrevocable trust to hold life insurance. Typically, the trustee will use the life insurance proceeds to buy assets from the estate and the cash can be used by the estate to pay various costs, including estate taxes.
Such a strategy may help heirs pay estate tax without having to liquidate or borrow against valued assets. Then the life insurance trust can liquidate and distribute the assets that have been purchased to the beneficiaries, who usually are the heirs to the estate.
Another approach is to have the life insurance trust remain in existence, keeping some or all of the assets it has purchased. Then the trust can act as a “family bank,” protecting those assets from creditors, divorce actions, and so on, but making distributions to the beneficiaries when they’re needed.
The prospect of a major change in tax law is causing many people to delay the creation of life insurance trusts, in the hope they won’t owe any estate tax. However, some life insurance trusts are still being created.
In many cases, newly-created trusts own inexpensive convertible term insurance rather than costly cash value life insurance. Then, if the tax laws change and the insurance coverage isn’t desired, you won’t have incurred as much cost. If you do need the policy, it can be converted to cash value insurance.