I have written in the past about Irrevocable Life Insurance Trusts and their advantage in removing life insurance from an individual’s taxable estate. The Grantor (person who creates Trust) forfeits flexibility and the ability to make substantial changes when using an Irrevocable Life Insurance Trust in order to obtain this advantage. For example, a Grantor cannot change the Trust beneficiaries.
However, some flexibility can be retained. The Grantor can remove and appoint a new Trustee, provided the new Trustee is an institution or an individual who is not "related or subordinate" to the Grantor within the meaning of Internal Revenue Code Section 672(c). The new Trustee named should not be the Grantor, or the Grantor’s spouse, parents, children, siblings or an employee of the Grantor. (There is an exception to the related or subordinate rule if the party named is an "adverse party" but that is beyond the scope of this Post.)
The relevant authority interpreting Section 672(c) is Wall Estate v. Commissioner, 101 T.C. 300 (1993) and Rev. Rul. 95-58 1995-2 C.B. 191. Although the Grantor’s ability to name a new Trustee does provide some indirect control over the Trust by the Grantor, any Trustee named must abide by its duty of complete loyalty to the Trust beneficiaries. Thus, regardless of who is named, the Grantor does not directly control the Trust or its assets.