Don’t throw away your life insurance trust and its expensive life insurance policy just because the estate tax is going away. Like a bad dream, in ten years it could be back.

The much ballyhooed estate tax reform and potential repeal is just that… potential. Congress made the tax law change subject to reversion to the existing law by 2011 unless modified by a future legislative act. And, the chances of this tax being eliminated, in my opinion, are very slight.

Our booming economy has deposited trillions of dollars of wealth in the hands of the Bob Hope generation. That generation came back from the world’s greatest war and set about building this country and this economy… and quite successfully. Now they are about to join the Henry Ford generation in demographer’s heaven, leaving a legacy of success and wealth to be managed by the next generation, our Baby Boomers.

There is a problem with this scenario. This successor generation is the largest single generation this country has ever known. When they pass into retirement in ten to fifteen years, they leave behind their productivity, their knowledge, and their leadership as they begin drawing upon a social security system into which they have paid all these years.

Generation X, coming next, will face the onerous task of paying the taxes required to pay the country’s bills, and, as a smaller generation, with fewer, less productive workers. Now, intuitively you should be able to get the picture: fewer workers, less wage base, more social security payouts, and more taxes.

Congress will have three choices: deficit spend and kill the economy, tax the living or tax the dead. Obviously the dead don’t complain or vote, so their first choice for raising taxes will be to go after estate transfers.

The need to estate plan is as great as ever. The uncertainty of the current laws make it imperative that larger estates take into consideration the prospect of future taxation. It would be a little tough to announce to Dad on Christmas of 2010, that his New Year’s Eve gift to the family is to check out for good since the law is coming back and there is no estate plan.

Life insurance remains one of the most important tools in an estate plan. Life insurance leverages pennies into dollars for the purposes of paying transfer and income taxes that are the byproducts of life’s success. If life insurance is owned outside of the estate of the decedent, it goes to the named beneficiary free of income and estate tax. The most common form of life insurance ownership for estate planning purposes is in an irrevocable life insurance trust.

Typical planning has the trustee of the trust applying for a life insurance policy on the life of the estate owner. The policy is payable at death to the trust. The trustee then uses the proceeds to supply liquidity to the estate for the payment of estate expenses, including taxes.

The problem with this planning is the lack of flexibility in a changing world and tax environment. Assets are usually out of reach of the beneficiaries until the insured dies and the trust collects on the policy. And, to give the spouse access to the life insurance cash value could cause the proceeds to be included in the taxable estate.

One solution is to set up a Spousal Support Trust (also known as a Spousal Access Trust) as the owner of the life insurance. This is the same irrevocable trust. However, by properly structuring and administering the trust, the assets in the trust would be accessible by the spouse and excludable from the estate of the insured, and that of his/her spouse. The non-insured spouse and the children could draw upon the assets of the trust during the lifetime of the insured for living and education expenses.