Irrevocable trusts are the standard home for life insurance bought to cover estate taxes. But clients often worry about locking a valuable policy away for good. A properly drafted grantor trust can keep the door open to reacquire the policy later without pulling the death benefit back into the estate.
Key takeaways
- Life insurance held in an irrevocable trust is generally kept out of the insured’s taxable estate.
- Under Rev. Rul. 2011-28, a grantor’s power to reacquire a policy by substituting assets of equal value is not, by itself, an incident of ownership, when proper safeguards are in place.
- A policy bought back from a grantor trust can often be sold back later without triggering the three-year rule or a transfer-for-value problem.
Rev. Rul. 2011-28 confirmed that a grantor’s substitution power, properly limited, does not cause estate inclusion of a trust-owned policy.
The standard ILIT strategy
Wealthy clients who expect an estate tax bill often buy life insurance inside an irrevocable life insurance trust (ILIT). They make gifts to the trust so the trustee can pay premiums, using annual exclusions or lifetime exemption to shelter the gifts. At death, the proceeds are outside the taxable estate and can provide liquidity to pay taxes. With the federal exemption now at $15 million per person, see our overview of what the $15M exemption means for planning.
The concern is what happens if the client later needs the policy back, for example as collateral for a business loan after health changes make new coverage hard to get.
What Rev. Rul. 2011-28 says
Many grantor trusts give the grantor a power to reacquire trust property by substituting other assets of equal value. Advisors once worried that this power, applied to a life insurance policy, might be an “incident of ownership” that would pull the death benefit back into the estate even if never used.
In Rev. Rul. 2011-28, the IRS concluded it is not an incident of ownership, provided that:
- The trustee has a fiduciary duty to ensure the substituted assets are of equivalent value, and
- The power cannot be exercised in a way that shifts benefits among trust beneficiaries.
Clients should confirm with their legal and tax advisors that their trust document meets these conditions.
Moving a policy out and back in
This flexibility can go both ways. Suppose a client reacquires a policy to use as loan collateral. Once the loan is repaid, the client may be able to sell the policy back to the grantor trust. Done properly:
- The three-year rule for gifted policies generally doesn’t apply, because the policy is sold for full value rather than gifted.
- Transfer-for-value is generally not an issue, because a sale to a grantor trust is treated for income tax purposes as a transfer to the grantor.
For more on why grantor trusts are so useful here, see our post on grantor trusts in life insurance planning.
Putting it to work
For clients hesitant about irrevocable planning, knowing there is a well-established way to get the policy back if needed can make the decision easier. Contact us if a client is weighing trust-owned coverage or the sale of an existing policy to a trust, and we can help you coordinate with their attorney.
Frequently asked questions
Can a grantor get a life insurance policy back out of an irrevocable trust?
Often yes, if the trust grants a power to reacquire assets by substituting property of equal value. Rev. Rul. 2011-28 held this power does not cause estate inclusion when the trustee must ensure equivalent value and benefits can’t be shifted among beneficiaries.
Does selling a policy to a grantor trust trigger the three-year rule?
The three-year look-back generally applies to gifts of life insurance. A bona fide sale for full value is generally not subject to it, though clients should confirm with their tax advisor.
Is a sale of a policy to a grantor trust a transfer for value?
Generally no. For income tax purposes, a sale to the insured’s own grantor trust is treated as a transfer to the insured, which is an exception to the transfer-for-value rule.
Reviewed by Tim Fuller on 2026-09-26
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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