An Irrevocable Life Insurance Trust can be designed for many special purposes, including the following:

• Gifts to Trust – A person can make gifts to a trust that he or she creates during a lifetime. In many cases these gifts can be excluded from gift taxes.* These gifts remove the appreciation of the asset from the estate, and for excludable gifts, remove the entire asset from the estate. Gifts are usually cash or assets that the trustee will immediately convert to cash.
• Trust Purchases Life Insurance – When using life insurance for estate planning purposes, the trust is usually the owner and beneficiary of the policy. The insured should be careful to retain no incident of ownership in the policy. (If the insured has any incidents of ownership in the policy, the entire death proceeds are taxable in the insured’s estate.) The trust pays the premiums on the policy (using gifts made to the trust) instead of the insured paying the premiums directly.

When existing policies are transferred by the insured, the death proceeds are brought back into the estate unless the insured lives more than three years from the date of transfer.

• Trust Receives Death Proceeds – When using life insurance for estate planning purposes, the trust is usually the owner and beneficiary of the policy. The insurance company pays the death proceeds to the trust and the trust then applies those proceeds in accordance with the provisions established in the trust agreement.
• Trust Pays Cash – The trust buys assets from the estate. Usually the trust uses the life insurance proceeds to buy assets from the estate that the heirs desire. The trustee can also lend money to the estate so that the executor does not have to liquidate assets to pay estate expenses, thus preserving those assets for the heirs.
• The Estate Pays Taxes – At a person’s death, the executor must first pay all estate taxes and expenses before the heirs get anything. The executor, if authorized, may look to the trust for help. The trust cannot be required to help. Of course, the trustee must do what is best for the trust beneficiaries – the heirs.

The trust can buy assets from the estate or loan the estate money. The executor uses that money to pay the taxes, and the trust passes those assets to its beneficiaries.

• Trust Receives Assets – The trust buys assets from the estate. The trustee may hold these assets, sell the assets at full market value, or distribute the assets to the trust beneficiaries – the heirs. The creator of the trust determines the framework for all such distributions.
• Assets Pass to Beneficiaries – The heirs are the beneficiaries of the trust.