Why income and estate-tax free? Well, proceeds from all life insurance policies are income-tax free. But it's the stringent rules of the irrevocable trust that allow those proceeds to be estate-tax free as well. Trust Your Better Judgment Once you put the life insurance policy into a trust, however, you relinquish control of it. That means you can never borrow from it. If you do, you're deemed to be the owner again, and it will be included in your estate when you die. In addition, once the money is in the trust and the beneficiaries are chosen, you can't change your mind later on. So if you leave the trust to your son, who turns out to be a spendthrift, then you may end up feeding his spending habit. You'll need to hire a trustee to take care of the trust because once it's set up, you no longer can make any of the trust's decisions. Your only responsibility is to keep giving the trust money so that it can pay the annual premiums on your life insurance policy. But giving money away opens you up to gift-tax issues (Ugh! More taxes!) so it is imperative that the trust is set up properly. Get a good attorney because the trust must be written with a lot of technical jargon. The proper technical jargon will allow the payments you make to the trust to be sheltered by the annual gift-tax exclusion. So, if the trust is written correctly, for 2005, you would be able to give it $11,000 gift-tax free so it can pay the premiums. Your spouse could then do the same. The trust can then take that $22,000 and pay your insurance premiums. And that's a lot of premiums! One more downside: If you happen to die within three years of establishing your irrevocable life insurance trust, you're considered owner of the life insurance policy and will owe estate taxes anyway.