Moving an Existing Policy Into an ILIT: The 3-Year Rule and Its Workarounds

Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294
Last reviewed October 3, 2026 · Published October 3, 2026

The rule

A gift of a life insurance policy within 3 years of death brings the proceeds back into the gross estate (IRC 2035(a)), because the insured would otherwise have held incidents of ownership under IRC 2042 (IRC 2042). The clock starts on the transfer date. The gift itself is valued at roughly the policy's value at transfer, which can use annual exclusion or lifetime exemption.

Three paths

Moving coverage into an ILIT

The sale workaround and transfer for value

Selling a policy can trigger the transfer-for-value rule, which limits the income tax exclusion on the death benefit to the price paid plus later premiums, unless an exception applies (IRC 101(a)(2)). One exception is a transfer to the insured. Revenue Ruling 2007-13 treats a transfer to a grantor trust of the insured as a transfer to the insured, which is why the sale is usually to a grantor ILIT. Your attorney confirms the trust's grantor status and the valuation.

When keeping the old policy is the better move

• Your health has changed, so a new policy would cost much more or be unavailable: transfer and accept the 3-year risk, or sell.
• You are healthy and the old policy is expensive or underperforming: a new trust-owned policy may be better, and avoids the rule entirely. Reviewing an older UL.
• A term policy you plan to convert: some attorneys have the ILIT own the converted permanent policy; timing matters.

Before any transfer, get an in-force illustration so everyone knows what the policy needs to stay in force once the trust owns it. How to read an in-force illustration.

Projected over the exemption, or own property in an estate-tax state?

Send a net worth range and your state. Within one business day you get a plain-English read on whether an ILIT is worth discussing with your attorney, and the policy design that would fit.

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Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.

Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer

Frequently asked questions

Sources

1. 26 U.S.C. §2035 (transfers within 3 years of death), Cornell LII
2. 26 U.S.C. §2042 (life insurance proceeds in the estate), Cornell LII
3. If a policy is transferred for valuable consideration, the exclusion is limited to the consideration paid plus later premiums; exceptions: carryover-basis transfers and transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer (as of 2026)
4. 26 U.S.C. §101 (death benefits, accelerated benefits), Cornell LII