By creating a life insurance trust, your clients can save their heirs some estate taxes after they have passed on. A life insurance trust takes over the responsibility of making the payments for the premiums and, after your clients death, the distribution of the policy among their heirs. Estate tax only applies when your client is the one responsible for paying the premiums. But by creating the trust, the policy is no longer part of their estate. Hence, no estate taxes apply to it after thier death.
Your client must hire a specialized estate attorney to draft their 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, they need to get a life insurance policy put into the trust unless they already have one. In this case, your client just moves their existing policy into the trust. Remember once the trust is setup, they cant change anything. If they 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 clients name and its subject to estate taxes. In addition, if they brought a policy they already had into the trust, they 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 clients trustee get a new policy after he or she sets up the fund.
Your client need to make a gift worth the first years 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 your client makes these payments as "present interest gifts", they may be able to deduct up to $10,000 per beneficiary in that tax year. This way the payments wont be considered taxable gifts.
Another reason for getting a new policy for the trust is because when your client brings their old policy into the trust, it is considered a taxable gift. They can use their unified credit and not have to pay taxes on this, but only if they have not used up the unified credit for other taxable gifts and estate.
Without the trust fund, the maximum amount of money that can pass to their heirs without taxes being applied to it is $625.000. After your client passes away, their heirs may get the bad news that the policys death benefits have increased over the amount of $625,000 and is now subject to 55% estate tax.