Gavin Morrissey, advanced planning consultant to Commonwealth Financial in San Diego, notes that one excellent use for life insurance in estate planning is within a credit shelter trust; this leverages the marital exemption.
Current tax law already allows the passing of $4 million tax free to an heir (the amount increases each year till 2010). If a spouse funds a credit shelter trust with that $4 million, the surviving spouse is allowed to access it for income and maintenance, and even to draw on the principal if necessary, but since it's inside the trust, that money is growing outside the estate of the surviving spouse.
To leverage that money, Morrissey suggests buying life insurance inside the trust--a single-premium paid-up policy or ongoing premiums, depending on what kind of assets are in the trust. This is contingent on the insurability of the surviving spouse, but avoids the need for Crummey notices and avoids the gift tax as well. It can also reduce the trust's tax bill.
To keep the surviving spouse's assets from creating an estate problem, he says, advisors should make sure that the surviving spouse is not a full trustee. Otherwise those assets will revert back to the estate. If the trust is already established, advisors should also have it reviewed by an attorney to ensure it is allowed to purchase insurance.