Hawaii is the rare state where the first thing a practitioner needs to know is what the statute does not say. The Legislature enacted a Life Settlements Act as Act 177, Session Laws of Hawaii 2008, codified as chapter 431E of the Hawaii Revised Statutes. That act carried a sunset, and the code now shows chapter 431E as repealed by its own terms. Secondary sources, compliance charts, and older law-firm summaries still cite 431E as live law. They are citing a repealed chapter.
What that means in practice is not that these transactions are unregulated in Hawaii — the Insurance Division retains general authority under the Insurance Code at HRS chapter 431, and producers and companies remain licensed — but that a practitioner should not represent to a client that a specific consumer protection applies without confirming the current statutory position with the Insurance Division. That is an unusual posture and it is worth knowing before you write a memo.
The tax side is more familiar, though Hawaii adds two state-level features that most states do not have: a state estate tax with the highest top rate in the country, and an alternative computation for capital gains. This guide is written for the CPA, EA, or tax attorney advising a Hawaii client who is contemplating a policy sale, has already closed one, or is trying to fund care and does not know the policy is an option.
In This Article
- The statutory picture in Hawaii, stated honestly
- Basis: the 2017 repeal your worksheet may have missed
- The three tiers, and Hawaii’s alternative capital gains computation
- Section 6050Y reporting and the transfer-for-value rules
- Hawaii’s estate tax is the real planning variable
- Medicaid, 209(b) status, and Hawaii’s care-cost problem
- Frequently Asked Questions
The statutory picture in Hawaii, stated honestly
The regulator is the Hawaii Insurance Division, which sits within the Department of Commerce and Consumer Affairs and is led by the Insurance Commissioner. The Insurance Code is Title 24 of the Hawaii Revised Statutes, principally chapter 431.
Hawaii’s dedicated life settlements framework arrived as Act 177, SLH 2008, and was codified as HRS chapter 431E. The act defined life settlement contracts, providers, and brokers along the lines of the NAIC model, and the debate at the time included a proposed multi-year holding restriction on investor-owned policies and a bond requirement for brokers. Act 177 also directed a report back to the Legislature. The chapter was repealed by section 7 of the same act, and the published code reflects that repeal.
What we can confirm is the enactment, the codification, and the repeal notation. What we cannot confirm from the public record alone is exactly which provisions, if any, were carried forward into the general Insurance Code or into administrative rules, and whether subsequent sessions restored a life settlement framework. That is a question for the Insurance Division, and it is the right call to ask them rather than to assert it. If you need a citation in an engagement letter or an opinion, request written confirmation of the operative authority from the Division; do not lift a 431E cite from a compliance chart. The client-facing version of this is on our page on life settlement licensing in Hawaii.
The practical consequence for you is that counterparty diligence carries more weight in Hawaii than it does in a state with a detailed, current statute. Verify that any provider or broker is appropriately licensed with the Division, insist on written disclosure of every fee and commission in the chain, and read the purchase agreement’s rescission provision rather than assuming a statutory one applies.
Basis: the 2017 repeal your worksheet may have missed
Under Revenue Ruling 2009-13, a seller’s adjusted basis in a life insurance contract was reduced by cumulative cost-of-insurance charges, which on a long-held contract could erase most of the basis and inflate reported gain. The companion ruling for surrenders imposed no such reduction, producing the inconsistent result that a sale was taxed more heavily than a surrender of the identical policy.
Section 13521 of the Tax Cuts and Jobs Act amended IRC section 1016(a)(1)(B) to eliminate the reduction, retroactive to transactions entered into after August 25, 2009. Adjusted basis is now cumulative premiums paid, less cash dividends received, partial surrenders, and untaxed distributions. Mortality charges and cost-of-insurance charges do not reduce it.
Two Hawaii-specific documentation issues come up more than they should. The first is policies issued decades ago by carriers that no longer service Hawaii business directly, where the premium history has to be chased through a successor administrator. Start that request early; sixty to ninety days is not unusual. The second is policies owned inside family entities or land-holding structures, which are common in Hawaii estate plans — the premium payer and the policy owner are not always the same person, and basis belongs to the owner. Establish the chain of ownership before you compute anything.
And gross up for loans. Where a policy loan is repaid at closing, the amount realized is the gross settlement price, not the net proceeds wired to the client. A $500,000 sale with a $120,000 loan payoff is a $500,000 amount realized.
The three tiers, and Hawaii’s alternative capital gains computation
Federally, the proceeds split into three buckets in a fixed order: basis recovery first and tax-free; then ordinary income equal to the excess of the policy’s cash surrender value over adjusted basis; then long-term capital gain for everything above the cash surrender value, reported on Form 8949 and Schedule D.
Hawaii’s overlay is where this gets interesting. Hawaii’s individual income tax reaches a top marginal rate of 11%, among the highest in the country, and Act 46 of the 2024 session began a multi-year widening of brackets and increase in the standard deduction that continues into the 2030s. Against that, Hawaii’s income tax law has long provided an alternative computation for net long-term capital gains at a flat 7.25% rate, which a taxpayer uses if it produces a lower tax than the regular graduated computation. For a client whose settlement produces a large gain tier, the difference between 11% and 7.25% on that slice is real money.
Confirm the current-year rate and the mechanics against the Hawaii Department of Taxation’s instructions before you rely on it; Hawaii’s income tax has been actively amended in recent sessions and an alternative-tax provision is exactly the kind of thing a rate-reform bill touches. But run the computation both ways. This is a place where the state return actually rewards attention, unlike most states, where the gain tier simply flows through at ordinary rates.
Note also that the ordinary income tier gets no such relief — it is ordinary income at the full graduated rate. That asymmetry is one more reason to establish the cash surrender value at closing precisely rather than using a year-end statement figure. Clients weighing the alternative are usually comparing against a surrender; our page on surrender versus sale lays out the client-side comparison.
| Item | Hawaii position | Practitioner action |
|---|---|---|
| Dedicated life settlement chapter | HRS ch. 431E (Act 177, SLH 2008) shows as repealed | Confirm operative authority with the Insurance Division |
| Regulator | Hawaii Insurance Division, within DCCA | Verify counterparty licensing before signing |
| State estate tax | Yes — HRS ch. 236E, $5.49M exclusion, top rate 20% | Test whether the policy is still doing estate-liquidity work |
| State inheritance tax | None | — |
| Top individual income rate | 11%, with Act 46 (2024) bracket changes phasing in | Model the ordinary income tier at full rates |
| Capital gains | Alternative computation at 7.25% has long applied | Run the return both ways; confirm current-year rules |
| Medicaid | Med-QUEST / QUEST Integration; Hawaii is a 209(b) state | Do not assume SSI resource rules apply |
| Median semi-private nursing facility cost | Roughly $14,000–$16,000 per month in recent surveys | Confirm actual pricing with the facility |
Section 6050Y reporting and the transfer-for-value rules
TCJA section 13520 added IRC section 6050Y, implemented by final regulations at T.D. 9879 and applicable to reportable policy sales after December 31, 2018. Form 1099-LS, Reportable Life Insurance Sale, is filed by the acquirer and furnished to the seller and the issuing carrier; it reports the gross amount paid. Form 1099-SB, Seller’s Investment in Life Insurance Contract, is filed by the issuer — the insurance company — and reports the seller’s investment in the contract and the surrender amount.
Practical advice: the 1099-SB is the form clients lose, and it is the one that supplies the numbers for tiers one and two. Request a duplicate from the carrier rather than estimating, and reconcile the carrier’s stated investment in the contract against your own premium reconstruction, because the carrier’s figure will not pick up pre-exchange premiums after a section 1035 exchange or premiums paid to a predecessor on an acquired block.
On transfer for value: IRC section 101(a)(2) makes a death benefit taxable to a transferee who acquired the policy for valuable consideration, above consideration plus subsequent premiums. TCJA section 13522 added section 101(a)(3), which shuts off the usual exceptions — carryover basis, transfer to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer — for a reportable policy sale. For the institutional buyer that is priced in. For a client contemplating a sale to an adult child, a business partner, or a family LLC, it is a live and expensive issue that needs a written analysis.
The opposite direction is IRC section 101(g), which treats amounts received on a sale to a licensed viatical settlement provider as paid by reason of death, and therefore excluded from income, where a physician certifies the insured is reasonably expected to die within 24 months. Chronically ill insureds under section 7702B(c)(2) get a narrower, per diem-limited exclusion. Because Hawaii’s dedicated chapter is repealed, confirming a provider’s licensing status for section 101(g) purposes takes an extra call to the Insurance Division rather than a statutory lookup.
Hawaii’s estate tax is the real planning variable
Hawaii is one of a minority of states that still imposes its own estate tax, and for practitioners it is the single most consequential state feature in this analysis. Hawaii’s estate and generation-skipping transfer tax sits in HRS chapter 236E. The exclusion amount has been set at $5,490,000, well below the federal figure, and the top rate reaches 20% — tied for the highest state estate tax rate in the country. Hawaii does not impose a separate inheritance tax.
The federal exclusion was set at $15 million per decedent for 2026 under the 2025 federal legislation and is indexed thereafter, so the gap between the federal and Hawaii thresholds is roughly $9.5 million. A very large number of Hawaii households are above the state threshold and nowhere near the federal one, driven almost entirely by real property values. That produces a specific and recurring fact pattern: a client with a modest income, a large unrealized gain in land or a home, and a life insurance policy originally purchased to provide estate liquidity.
That policy may still be doing its job, and this is the case where the honest answer is often to keep it. If the estate is genuinely exposed to a Hawaii estate tax and the policy is properly owned outside the taxable estate — typically in an irrevocable trust — selling it converts a tax-free, estate-excluded death benefit into a currently taxable receipt sitting inside the estate. That is usually the wrong trade. Where the policy is owned personally, however, the death benefit is already in the taxable estate for Hawaii purposes, and the calculus changes. Ownership is the fulcrum. The general mechanics of trust-owned policies are on our page about selling an ILIT or trust-owned policy, and the client-facing Hawaii tax summary is on our page on life settlement taxes in Hawaii.
Medicaid, 209(b) status, and Hawaii’s care-cost problem
Hawaii Medicaid runs through the Med-QUEST Division of the Department of Human Services, with long-term services and supports delivered through QUEST Integration managed care plans. Hawaii is one of the small group of remaining section 209(b) states, meaning it is permitted to apply eligibility criteria more restrictive than the federal SSI standard in some respects. Practitioners who work off national summaries get this wrong: do not assume Hawaii’s aged, blind, and disabled rules mirror SSI. Confirm the current resource limit and methodology with Med-QUEST rather than importing a figure from a mainland chart.
Hawaii’s care costs are among the highest in the nation. Recent published cost-of-care surveys put the median semi-private nursing facility rate in the range of roughly $14,000 to $16,000 per month, and Hawaii has a persistent shortage of skilled nursing beds that produces long acute-care stays for patients who are medically ready to discharge but have nowhere to go. Neighbor-island families face the additional problem that an appropriate placement may be on Oahu, which turns a care decision into a relocation decision.
On the policy itself: under 20 C.F.R. section 416.1230, cash surrender value is a countable resource unless the total face value of all policies on the insured is $1,500 or less, in which case the cash value is excluded. Term insurance with no cash value is not a resource. A sale at fair market value is not an uncompensated transfer and does not create a 60-month look-back penalty, but the proceeds become a countable resource in the month after receipt — which is where an unplanned sale defeats eligibility. Our page on whether life insurance counts as a Medicaid asset covers the resource rules for clients.
One professional-conduct note before you close the file. A CPA should take no referral fee, finder’s fee, or commission in connection with a client’s policy sale. The AICPA Code of Professional Conduct requires disclosure of commissions and referral fees and prohibits commissions outright with respect to an attest client, and insurance codes across the country separately prohibit compensating accountants and attorneys in connection with policies insuring terminally ill individuals. Charge your normal fee for the analysis and take nothing from any party to the transaction. Pine Lake Life Solutions provides education and a free policy review and does not purchase policies; we do not provide legal, tax, or investment advice. If a second read on a client’s contract would be useful, the review is free at (305) 209-7183.
Frequently Asked Questions
Can I still cite HRS chapter 431E as Hawaii’s life settlement law?
No. Chapter 431E was enacted by Act 177, Session Laws of Hawaii 2008, and the published code shows it repealed by section 7 of that act. Compliance charts and older summaries still cite it, which is how the error spreads. If you need authority for a memo, request written confirmation of the operative framework from the Hawaii Insurance Division rather than relying on a secondary source.
Should a Hawaii client with a taxable estate sell an ILIT-owned policy?
Usually not, and this is the most important honest answer on the page. Hawaii’s estate tax exclusion of $5,490,000 is far below the federal figure, so many Hawaii estates are exposed. A properly structured irrevocable trust keeps the death benefit outside the taxable estate and income tax free. Selling converts that into a currently taxable receipt. Test ownership before anything else.
Does Hawaii’s 7.25% capital gains alternative apply to the gain tier of a settlement?
Hawaii’s income tax law has long provided an alternative computation for net long-term capital gains at a flat rate, used when it produces a lower tax than the graduated computation. The gain tier of a settlement is long-term capital gain if the contract was held over a year, so it should qualify. Verify the current-year rate and mechanics with the Hawaii Department of Taxation before relying on it.
Is Hawaii’s Medicaid resource limit the same as the federal SSI figure?
Do not assume so. Hawaii is one of the remaining section 209(b) states, which are permitted to apply eligibility criteria more restrictive than SSI in certain respects. National summaries frequently list a single nationwide figure that does not reflect Hawaii’s methodology. Confirm the current resource limit and the treatment of life insurance directly with the Med-QUEST Division.
What documents should I ask a client to gather before I run the numbers?
The policy cover page showing form number, issue date, face amount, and owner; the most recent in-force illustration; a complete premium history from the carrier, including any predecessor carrier after a 1035 exchange; the current loan balance; and the closing statement if a sale has already occurred. Without the premium history, basis is an estimate, and an estimate on that line invites a notice.
Does the ordinary income tier get any Hawaii rate relief?
No. The excess of cash surrender value over adjusted basis is ordinary income and is taxed at Hawaii’s graduated rates, which top out at 11%. Only the portion above cash surrender value is capital gain and potentially eligible for the alternative computation. That makes establishing the exact cash surrender value at closing, rather than at year end, worth the extra request to the carrier.
Find out what your policy is worth — free, confidential, no obligation.
A 15-minute educational review covers your eligibility, every alternative, and a realistic view of what each path would net you.
Related Reading
- Life Settlement Licensing Hawaii
- Life Settlement Taxes Hawaii
- Hawaii Insurance Department Consumer Help
- Hawaii Medicaid Asset Income Limits
- Sell Ilit Trust Owned Policy
- Surrender Vs Sell Policy
- Life Insurance Counts Medicaid Asset
- Estate Planner Life Settlement Guide Hawaii
Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.