The insured must never have any incidents of ownership in their insurance policy to prevent that policy from being included in their estate. This goal is easy to satisfy when purchasing a new policy because the life insurance trust can be prepared before the client takes steps to purchase insurance. Meaning, the TOLI is established before an insurance application is submitted, and the trustee (rather than the insured) is the applicant.
If the insured has already applied for the policy before the TOLI is created, it may still be possible to avoid the 3-year rule if: (1) the insured did not pay any premiums; (2) the trustee submits a replacement application before issuance; and (3) the first premium is paid by the trustee. However, the 3-year rule cannot be avoided by using a substitute application if the trust was created after the insured filed an application for insurance.
If you owned a policy for less than a year, an insurance agent may suggest using a substitute application dated after signing the TOLI that shows the trustee as the applicant and owner. This, however, will have no legal effect in avoiding the application of the 3-year rule as it is a blatant attempt to backdate a contract/get rid of a paper trail.
Lastly, to avoid further contentions that the creation of a life insurance trust involves a transfer with incidents of ownership, the trustee should not be a mere agent of the insured.
