What is a "life insurance trust" designed to do?

A life insurance trust is specifically structured to hold a life insurance policy for the purpose of avoiding estate taxes. The key feature of such a trust is that when the policyholder passes away, the proceeds from the life insurance policy can be distributed to beneficiaries without being included in the policyholder's taxable estate. This can significantly reduce the estate tax liability and ensure that more of the policy's value is preserved for the beneficiaries.

By establishing a life insurance trust, the policyholder can effectively remove the life insurance policy from their estate, which can be particularly advantageous in estate planning. This strategy is utilized by individuals who are concerned about their heirs facing substantial estate taxes upon their death, as the taxable value of the policy would otherwise increase the overall estate value and lead to higher taxes.

The other options provided do not accurately reflect the primary function of a life insurance trust. Immediate payouts and investment flexibility may pertain to other financial products or arrangements, but they do not encapsulate the tax avoidance goal that a life insurance trust is specifically designed to achieve.