Updated: Dec 10, 2019
IRS Rules Favorably on Use of “Power of Substitution” in Life Insurance Trust
The Internal Revenue Service, in Rev. Rul. 2011-28, has ruled that the retention, in a nonfiduciary capacity, by the grantor of a life insurance trust of a § 675(4)(C) “power of substitution” over trust assets will not be viewed as the retention of an “incident of ownership” in the policy under § 2042. The ruling concludes that the retained substitution power will not cause inclusion of the proceeds of the policy in the grantor’s gross estate so long as (i) the grantor may not serve as trustee, (ii) the trustee has a fiduciary obligation to insure that the substituted assets are of equivalent value, and (iii) the substitution power cannot be exercised in a manner that can shift benefits among the trust beneficiaries.