In contrast to living trusts, which can be revoked and changed at will by the persons who create the trusts, irrevocable trusts have fixed terms and conditions and cannot be changed by the trust creators. Irrevocable trusts play an important role in estate plans that seek to minimize estate taxes by removing value from the estate before death.
Life Insurance trusts are irrevocable trusts designed to utilize gift tax exclusions and exemptions to freeze or reduce estate value. Property placed into an irrevocable life insurance trust is removed from the estate and allows you to use the annual gift exclusion (in 2011, $13,000 per year per beneficiary) to shelter your gifts from the gift tax regime. When the trust owns a life insurance policy on your life, you can transfer the annual exclusion amount to the trust to pay the premiums. When you die, the life insurance proceeds pass to the beneficiary outside of your estate (thus avoiding estate taxes). In this way, an irrevocable life insurance trust is an effective way to provide the liquidity your beneficiaries may need at your death outside of your estate. The life insurance proceeds can be used by the beneficiary to fund a buy-sell agreement, pay estate taxes, support loved ones, or settle other obligations at your death. When designing an irrevocable trust, you must pay close attention to the possible tax complications that can arise from the selection of certain trustees and beneficiaries and from the character of the property (community or separate property) used to fund the trust. If the trust will receive annual gifts, there also must be an on-going plan for providing notice to trust beneficiaries in order to effectively use your annual exclusion.