147 / If income of an irrevocable funded life insurance trust is used to pay premiums on a policy insuring the grantor’s life, is the income that is used taxable to the grantor?
Yes, unless the policy is irrevocably payable to a charity.1 It is immaterial whether the insurance is taken out by the grantor before the trust is created or by the trustee after it is created.2 The rule applies to income used to pay the investment portion of the premium as well as to income used for pure insurance protection.3 It also applies to income used for policies dedicated to business uses as well as to those for personal estate planning purposes.4
Moreover, trust income is taxable to the grantor if, without the approval or consent of an adverse party, it may be used for the payment of premiums on insurance on the grantor’s life, even though it is not actually used for this purpose. Thus, where policies on the grantor’s life are placed in the trust, trust income is taxable to the grantor to the extent that the trustee has discretionary power to use it for premium payments.5
If the policies are owned by the grantor or by someone other than the trust, however, the trust income is taxable to the grantor only if it actually is used to pay premiums, or if the trustee is specifically authorized to use it for this purpose.6