Life insurance is a perfect asset for an irrevocable trust, although an irrevocable trust will usually be funded with other types of property as well. The reason life insurance is so suitable is that it performs the function of providing the liquidity needed by an estate at death. The difference between the value of life insurance during life and at the moment of death is dramatic, meaning that the difference between the gift tax paid (if any) and the estate tax that would be paid is equally dramatic.
If life insurance is transferred by the insured and the insured dies within three years, the proceeds of the policy will be includible in the insured’s estate. If an irrevocable trust purchases a life insurance policy in the first instance (so that there is no transfer), the three-year rule may be avoided.