You may want to set-up an irrevocable life insurance trust. This effective estate planning tool is designed to collect the proceeds of your life insurance from a term insurance or permanent insurance policy for the benefit of your spouse, children and future grandchildren without incurring federal or state transfer taxes. In addition (if properly structured), the insurance proceeds can be made available to replace funds used by your estate and trusts to pay any estate taxes arising upon the surviving spouse’s death. Other advantages of creating an irrevocable life insurance trust are that: (1) the proceeds may not be subject to the claims of the creditors of the insured; and (2) the proceeds may not be subject to the insured’s spouse’s elective share right.
The primary disadvantage of having a life insurance policy held by an irrevocable trust created during your lives is that the insured may not retain the power to modify the interests of the trust beneficiaries. In addition, the insured must be willing to relinquish control of the assets transferred to the trust. Finally, the insured must not need to retain any economic benefit in the life insurance policy and must be able to transfer all such benefits to the trust. Thus, for example, the insured may not be able to retain the right to cash in or borrow against the cash surrender value of any life insurance policy after it is transferred to the trust. This disadvantage can be overcome by employing private split dollar funding techniques, which allow for the premiums to be loaned by someone other than the grantor to the trust and to recover the premiums either at death or upon the trustee taking a loan out from the trust if there is cash surrender value on the policies held by the trust.