This is all about death and taxes -- the estate tax, to be precise, which is likely to remain a fact of life.

Oh sure, if you could plan your death for tax purposes, then you would consider 2010; thanks to a peculiarity of the last tax-cut package, there will be no estate tax that year. After that, the tax returns, and most pros believe it will remain in place in some form for, well, forever.

Therefore, you have no choice but to prepare for it. So consider putting a life insurance policy in an irrevocable trust as a way to ensure that your heirs will have enough money to pay that estate-tax bill.

For 2005, if your estate is worth more than $1.5 million ($3 million for a married couple) your heirs will owe estate tax on the overage. And unless they have big bucks lying around, they'll most likely use the money from your estate to pay the bill. So instead of handing Uncle Sam part of their inheritance, that irrevocable life insurance policy trust could be used to pay estate taxes.

Granted, many of us think of life insurance as something you pay for your whole life so that your spouse and kids have money to play with after you're gone. But if you have already amassed enough money to give to them upon your death, they probably don't need your life insurance proceeds in addition to everything else. So let them use the proceeds from your policy to pay those wicked estate taxes.

But it's imperative that your policy be in a trust. If not, the proceeds from the policy will be considered part of your estate when you die. You will then owe estate tax on that money and that defeats the whole point!

With your life insurance policy in an irrevocable trust, the proceeds become free of income and estate tax because the trust now owns the policy, says Bill Fleming, director of personal financial services at PricewaterhouseCoopers in Hartford, Conn.

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.

Don't think you can set the trust up and forget about it. Depending on the type of insurance policy you put in the trust, you may need to adjust your premiums from time to time to make up for market fluctuations.

Here's why.

Remember, there are basically two types of insurance policies: term and permanent. The premiums on a term policy are paid over a fixed period of time. When the premiums end, so does the policy. If the policyholder dies while still paying the premiums, his heirs get the assigned payout income-tax free.

Permanent policies, in turn, offer a death benefit with an investment angle. A permanent policy has a cash account that allows the excess money to grow tax-deferred and these policies can go on for as long as you like.

Many of these permanent policies invest in the stock market, and, unfortunately, about 80% of them are underperforming, notes Fleming. So you might have to pay your premiums longer than expected, to reach your target. You'll need to work with your trustee to ensure that your irrevocable life insurance trust is growing at the rate you need so that your beneficiaries will have enough money to cover your estate-tax bill.

Death and taxes are not the happiest of subjects to talk about. But doing some planning now will prevent any unnecessary unhappiness when the time comes.