After the policy is transferred, the new owner should make any premium payments due. If you make payments, the IRS might contend that you're keeping an "incident of ownership" (as discussed above) and include the proceeds in your federally taxable estate -- precisely what you're trying to avoid. If the new owner can't make the payments, you can give her money for them.

If you give a paid-for single-premium policy to a new owner, there are no future payments to worry about. Because it's paid for in full once it's purchased, single-premium life can be a particularly convenient type of policy to give away. However, there can be a drawback here, too. If the value of the policy at the time of the gift exceeds the amount that is exempt from gift tax (currently, $11,000), the IRS will assess gift tax on the excess amount. By contrast, if you transfer ownership of a policy that has premiums due each year, and then every year you give the recipient a gift of less than $11,000 to pay for those premiums, no gift tax will be assessed.

Why create a life insurance trust, rather than simply transfer a life insurance policy to someone else? One reason can be that there's no one you want to give your policy to. In other words, you want to get the proceeds out of your taxable estate, but you want to exert legal control over the policy and avoid the risks of having an insurance policy on your life owned by someone else -- perhaps a spouse or child you don't trust to pay policy premiums. For example, the trust could specify that the policy must be kept in effect while you live, eliminating the risk that a new owner of the policy could decide to cash it in.