Since life insurance can be used to leverage the amount "invested" into a much higher sum, life insurance is often used in trusts for the benefit of grandchildren. The cash values grow tax deferred. However, the gain inside the contract is never recognized if the life insurance is kept until death, due to the income tax free nature of the death benefit. If properly set up, the grandchildren can receive the insurance proceeds free of estate taxes. Moreover, life insurance is the vehicle of choice to get money exceeding Generation Skipping Limits to grandchildren without incurring additional taxes. Annual gifts to grandchildren or partial use of the unified credit can be leveraged with life insurance. This can allow a wealthy family to leave far more to grandchildren than would be possible under costly generation skipping taxes (in addition to estate taxes).

Additional Information on Estate Planning:

Estate Planning Overview
Irrevocable Life Insurance Trusts (ILITS)
Using Ownership and Beneficiary Designations
How to Get Existing Policies Out of my Estate
Can the Three-Year Rule be Avoided?
Second to Die Life (Survivorship) Insurance
Gifts - Overview
Leveraging Your Gifting Program
Grandchildren
Generation Skipping
Living Trusts
Credit Bypass Trust
Charitable Remainder Trusts
Avoid Capital Gains Income for life

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