Of course, any time you use qualified plan assets, such as a life insurance policy, with a subsequent sale, there are a number of tax, ERISA and legal issues to consider. One of these is the transfer-for-value rule. The sale of the contract can violate the transfer-for-value rule, thus causing a portion or all of the policys death proceeds to be income taxable.
One way to avoid this is to have the language in the irrevocable trust written so as to make it a grantor or “defective” trust for income tax purposes. This avoids the transfer-for-value rule since the trust is considered to be the same as the grantor.
Swanson v. Comm., 518 F.2d 59 (8th Cir., 1955) is generally cited for the principle that the grantor is the owner of the trust assets and that transfer of the policy to the trust is within the exception.