Irrevocable Trust
An irrevocable trust may be considered when the estate owner's primary objective
is to obtain federal estate tax savings. When property is placed in an
irrevocable trust, the grantor is giving the property away permanently. Since
the grantor no longer owns the property, it will not become part of the gross
estate and will not be subject to federal estate tax.
Life insurance intended to pay federal estate tax may be the only asset an irrevocable trust will hold. If life insurance is purchased to pay federal estate tax, the objective usually is to keep the insurance proceeds out of the grantor's estate and not subject it to tax.
Ideally, the trust should be established before the life insurance is purchased. The trust is named the owner and beneficiary of the life insurance contract. The trust will purchase the policy, rather than the estate owner or insured gifting the policy to the trust after purchase. This is important since insurance that is gifted within 3 years of an estate owner's death, including to an irrevocable trust, will be brought back into the estate and be subject to federal estate tax.