A life insurance trust can be used to remove a significant asset from being counted as part of an estate for tax purposes. This type of trust is irrevocable, so the grantor who places the insurance policy in the trust gives up all control over the policy. This means the grantor can name the beneficiary at the time the trust is set up, but cannot change this decision later. The grantor also can't borrow against the value of the policy.

An existing life insurance policy can be placed in a trust. However, the policy will still be considered part of the grantor's estate for the next 3 years. If the grantor dies during this period, the policy proceeds will be taxable as part of the estate. The cash value of the policy at the time it is placed in the trust is also considered to be a taxable gift. Both these problems can be avoided by having the life insurance trust take out a new policy that does not yet have any cash value. However, the premiums paid for the insurance policy may have estate and/or gift tax consequences.