The following article was written by  New Jersey Lawyer Michael B. Mangini, Attorney at Law  and was found on New-Jersey-Lawyers.com

  CONSIDER AN IRREVOCABLE LIFE INSURANCE TRUST (ILIT)
TO REDUCE ESTATE TAXESInsurance on your life will be included in your taxable estate if either (1) Your estate is the beneficiary of the insurance proceeds, or (2) You possessed certain “incidents of ownership” in the policy within three years of your death. Incidents of ownership that will cause the proceeds to be taxed in your estate include the rights to: change beneficiaries, assign the policy, pledge the policy as security for a loan, borrow against the policy’s cash surrender value, and surrender or cancel the policy. A life insurance trust is an effective way to keep life insurance proceeds from being taxed in your estate. The irrevocable life insurance trust owns the policy and receives the proceeds after your death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as well as in the estate of your surviving spouse. It also protects the trust beneficiaries against their creditors, including an ex-spouse in the event of divorce. Here’s how the irrevocable life insurance trust works. You create an irrevocable life insurance trust to be the owner and beneficiary of one or more life insurance policies on your life. You may either assign an existing policy to the trust (in which case you must live for three years) or the trustee may purchase a new policy on your life. You contribute cash to the trust and the trustee pays the premium. If the trust is properly drafted, the contributions you make to the trust for premium payments will qualify for the annual gift tax exclusion ($12,000.00 in 2007), so you won’t have to pay gift tax on the contributions. The life insurance trust typically provides that, during your lifetime, principal and income, in the trustee’s discretion, may be paid or applied to or for the benefit of your spouse and descendants. This allows indirect access to the cash surrender value of the life insurance policies owned by the trust, and permits the trust to be terminated if desired despite its being irrevocable. On your death, the trust continues for the benefit of your spouse during his or her lifetime. Your spouse is given certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of, your descendants.

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