By creating a life insurance trust, you can save your heirs some estate taxes after you have passed on. A life insurance trust takes over the responsibility of making the payments for the premiums and, after your death, the distribution of the policy among your heirs. Estate tax only applies when you are the one responsible for paying the premiums. But by creating the trust, the policy is no longer part of your estate. Hence, no estate taxes apply to it after your death. There are lots of life insurance companies to find the right life insurance quote for you and your family.
You must hire a specialized estate attorney to draft you a life insurance trust. He must be someone who is responsible and reliable because the trust could be going for the next ten years and he could also serve as a trustee. Next, you get a life insurance policy to put into the trust unless you already have one. In this case, you just move your existing policy into the trust. Remember once the trust is setup, you can't change anything. If you try to change things after the trust has been set up, the government might see it as an "incident of ownership", meaning the policy is still in your name and it's subject to estate taxes. In addition, if you brought a policy you already had into the trust, you must have it there for at least three years or it will be subject to estate taxes. The best thing to do is to have your trustee get a new policy after you set up the fund.
You need to make a gift worth the first year's premium to the trust so the trustee can make the payments. After that make gifts in the name of the beneficiaries to the trust at least 30 days before the policy premiums are up. If you make these payments as "present interest gifts", you may be able to deduct up to $10,000 per beneficiary in that tax year. This way the payments won't be considered taxable gifts.
Another reason for getting a new policy for the trust is because when you bring your old policy into the trust, it is considered a taxable gift. You can use your unified credit and not have to pay taxes on this, but only if you have not used up your unified credit for other taxable gifts and estate.
Without the trust fund, the maximum amount of money that can pass to your heirs without taxes being applied to it is $625.000. After you pass away, your heirs may get the bad news that the policy's death benefits have increased over the amount of $625,000 and is now subject to 55% estate tax.
So be wise and think of the future. By making careful and knowledgeable decisions, you can help assure that your children inherit everything you intended them to inherit.