The federal basic exclusion amount is $15 million per decedent for 2026 under the 2025 federal tax legislation, which means the great majority of irrevocable life insurance trusts drafted between 1995 and 2012 were built to solve a problem their settlors no longer have. Those trusts still hold policies. Those policies still consume premiums. And the trustee — often a family member who agreed to serve twenty years ago without understanding what was being agreed to — still owes fiduciary duties with respect to an asset nobody has looked at in a decade.
This guide follows an ILIT through its life cycle rather than through the tax code, because that is how the problem actually presents in an Alaska practice: a client calls about something else, mentions in passing that the trust premium notice arrived and it went up again, and the trustee has no idea whether the policy is performing, whether it is worth anything, or whether they are allowed to do anything about it.
In This Article
- Stage One: The Original Purpose, and Whether It Survives
- Stage Two: The Crummey File
- Stage Three: Drift, and the Duty to Notice It
- Stage Four: Disposition, and the Alternatives to a Sale
- Stage Five: Termination, Distribution, and Reporting
- The Alaska Planning Context
- Regulator, Statute, and Verifications
- Frequently Asked Questions
Stage One: The Original Purpose, and Whether It Survives
Start with the reason the trust was created. In practice there are four, and they age very differently.
- Estate liquidity. The dominant reason. A client with a taxable estate needed cash at death to pay the tax without forcing a sale of illiquid assets. With a $15 million per-decedent federal exclusion and portability of a deceased spouse’s unused exclusion, this purpose has evaporated for most families who created these trusts. Alaska adds nothing on top: the state imposes no estate tax and no inheritance tax.
- Business continuity. Funding a buy-sell obligation or replacing a key person. This purpose survives or fails on facts external to the tax law — whether the business still exists, whether the partner has been bought out, whether the agreement still binds.
- Family equalization. Where one child receives an illiquid asset and the policy funds the others. Often still valid, and worth checking before assuming the trust is obsolete.
- Protection of a dependent. A special needs beneficiary, a second marriage, a child with creditor exposure. Frequently still valid.
The professional error is treating the exclusion change as automatically dispositive. It is dispositive for the first purpose and irrelevant to the other three. Ask the settlor, if living, and read the trust instrument for a statement of purpose — many recite one. The interaction between exclusion changes and a policy’s continuing role is developed at how a change in the estate tax exclusion affects a policy.
One caution on the federal figure. The exclusion is now indexed and was made permanent by statute rather than sunsetting, but “permanent” in tax legislation means only that no sunset date is currently written into the code. Advise on the law as it exists and revisit.
Stage Two: The Crummey File
Withdrawal rights under Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), are what converted transfers to the trust into present-interest gifts eligible for the annual exclusion. Later authority, including Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991), extended the analysis to contingent beneficiaries holding withdrawal powers.
The mechanics are simple and the compliance record is almost never complete. What should be in the file, per year, per beneficiary:
- Written notice of the contribution and of the right to withdraw, delivered to each beneficiary holding a withdrawal power.
- A reasonable window during which the right could actually be exercised — commonly 30 days, though the instrument controls.
- Evidence of delivery, or at minimum a contemporaneous record of mailing.
- A record of the trust’s separate bank account receiving the contribution before the premium is paid, rather than the settlor paying the carrier directly.
What is typically in the file: nothing after year three. The settlor made contributions, the trustee paid premiums, and the notices stopped. The exposure this creates is a gift tax exposure — contributions may not have qualified for the annual exclusion, which means gift tax returns were understated or unfiled and exclusion was consumed. It is not usually catastrophic given current exclusion levels, but it should be identified and addressed with the client’s tax counsel rather than discovered later. The practical remediation options are surveyed at what to do when Crummey notices are missing.
Where a policy sale is being considered, the Crummey record matters for a second reason: it establishes who the beneficiaries actually are and what they were told. A trustee proposing to dispose of the trust’s principal asset is in a much better position having communicated with those beneficiaries annually for twenty years than having gone silent in 2007.
Stage Three: Drift, and the Duty to Notice It
A trustee holding a life insurance policy holds an investment. That framing is the whole of the fiduciary problem, and it is the one most family trustees have never had explained to them.
Under prudent investor principles reflected in the Uniform Prudent Investor Act and in the Restatement (Third) of Trusts, a trustee has a duty to monitor trust property and to act with prudence in retaining or disposing of it. Life insurance is frequently carved out or modified by statute or by the trust instrument, and Alaska practitioners should read both the instrument’s exculpatory and investment provisions and the governing statutes in Title 13 of the Alaska Statutes before advising a trustee about the scope of the duty. What is not seriously contestable is that a trustee who never requests an in-force illustration, never notices that the policy will lapse in 2029, and never tells the beneficiaries has a problem.
Two decisions bracket the range. In Rafert v. Meyer, 290 Neb. 219 (2015), the Nebraska Supreme Court declined to let a broad exculpatory clause insulate an ILIT trustee whose failure to attend to premium notices resulted in policies lapsing — a reminder that boilerplate exoneration is not absolute. In In re Stuart Cochran Irrevocable Trust, 901 N.E.2d 1128 (Ind. Ct. App. 2009), the court upheld a trustee who exchanged an underperforming variable policy for a guaranteed contract with a lower death benefit, on the ground that the decision was reasoned and documented at the time it was made. The through-line is process. Documented deliberation is protective; inattention is not.
The concrete annual step: request a current in-force illustration from the carrier, in writing, run at both guaranteed and current assumptions, and put it in the trust file with a short memo. It shows the premium needed to carry the contract to maturity and the lapse date under the current premium. It is the single document that converts a trustee from inattentive to informed. The duty framework is developed at a trustee’s duty regarding an underperforming policy.
| Disposition path | Cash generated | Coverage retained | Principal risk |
|---|---|---|---|
| Continue as drafted | None | Full | Premium drain on an obsolete purpose |
| Reduce benefit / nonforfeiture | None | Partial | Beneficiaries object to reduced benefit |
| 1035 exchange | None | Restructured | New contract underperforms too |
| Surrender | Cash surrender value | None | Leaves market value on the table |
| Secondary market sale | Typically the highest figure | None | Taxable event; § 6050Y reporting |
| Distribute to beneficiary | None | Full, outside trust | § 2035 three-year rule; transfer-for-value |
Stage Four: Disposition, and the Alternatives to a Sale
When the trust’s purpose has lapsed and the policy is underperforming, there are six paths and a sale is only one of them. Rank them honestly for the trustee.
- Continue as is. Correct where the death benefit still serves a live purpose and the premium is affordable. Document why.
- Reduce the death benefit to the level the existing account value will sustain without further premiums, or elect a nonforfeiture option. Preserves coverage, ends the funding obligation.
- Section 1035 exchange into a contract with better guarantees or lower cost. This is what the trustee in Cochran did. Preserves tax deferral; does not generate cash.
- Surrender for cash value. Simple, and frequently the worst economic outcome where the insured’s health has declined, because surrender value is a carrier formula rather than a market price.
- Sell the policy in the secondary market. Produces the highest cash figure where the insured is older or impaired, at the cost of ending the coverage and generating a taxable event.
- Distribute the policy to a beneficiary who wants to maintain it, where the instrument permits. Watch IRC § 2035’s three-year rule if the distributee is the insured, and the transfer-for-value rules under IRC § 101(a)(2).
A trustee who documents the comparison among these six has done the job. A trustee who does one of them without comparing has not, regardless of which one they chose. The trust-owned sale process specifically — consents, beneficiary notice, carrier requirements — is set out at selling an ILIT or trust-owned policy.
Pine Lake Life Solutions is an educational resource for planners and fiduciaries and does not purchase policies. Pricing in the secondary market is done by licensed providers; a no-cost policy review through a licensed broker produces an indicative range that a trustee can put in the file alongside the surrender value and the in-force illustration.
Stage Five: Termination, Distribution, and Reporting
Once the policy is disposed of, the trust holds cash and usually has no continuing purpose. Termination and distribution then raise their own questions: whether the instrument permits early termination, whether a nonjudicial settlement agreement among beneficiaries is available, whether court approval is needed, and how the remainder interests are valued. Those are trust administration questions specific to the instrument. The disposition sequence is discussed at ILIT termination and policy disposition.
On the tax side, four items belong on a checklist for the client’s tax adviser:
- Character and amount of gain. Revenue Ruling 2009-13 and Revenue Ruling 2009-14 set out the framework for a sale by the policy owner and for the buyer’s treatment. The Tax Cuts and Jobs Act removed the cost-of-insurance basis reduction that had applied to sales, for transactions after August 25, 2009, which generally increases basis and reduces reported gain relative to the pre-2017 analysis.
- Information reporting. A reportable policy sale triggers the IRC § 6050Y regime, generating Forms 1099-LS and 1099-SB. The trustee should expect these and should not be surprised in February.
- Transfer-for-value. IRC § 101(a)(2) and its exceptions matter enormously if the disposition is to a related party or to a business entity rather than to a licensed provider.
- Grantor trust status. Whether the trust is a grantor trust as to the settlor changes whose return the gain lands on. Read the instrument.
Alaska imposes no state income tax, so there is no Alaska layer on the gain and no Alaska fiduciary income tax on trust-level income — a genuine administrative simplification relative to trusts sited in taxing states. The federal framework is outlined at Alaska life settlement taxes. None of this is advice a planner should give in their own voice unless tax is their practice; route it to the client’s CPA.
The Alaska Planning Context
Three features of Alaska law are worth holding in mind when advising on a trust-owned policy, because they affect why the trust may have been sited in Alaska in the first place and what flexibility exists now.
Self-settled asset protection. Alaska enacted the first domestic asset protection trust statute in 1997, at AS 34.40.110, permitting a settlor to be a discretionary beneficiary of an irrevocable trust while limiting creditor access. Many Alaska-sited trusts holding insurance were drafted with that statute in view, and the instrument’s spendthrift and discretionary provisions may be doing work beyond the estate tax purpose.
Perpetuities. Alaska substantially relaxed the common law rule against perpetuities, permitting trusts of very long duration. A trust drafted to last a thousand years was not drafted with the expectation that its sole asset would be a policy on a settlor who is now 84. That mismatch is worth naming to the client.
Community property by election. Under the Alaska Community Property Act at AS 34.77, spouses — including, through an Alaska community property trust, nonresident spouses — may elect community property treatment for designated assets. The relevance here is basis: community property receives a full basis adjustment at the first death, which changes the comparison between holding an appreciated asset and holding a life insurance death benefit. Where a client’s plan includes an Alaska community property trust alongside an ILIT, the two should be analyzed together rather than separately.
Because Alaska imposes no state estate tax, no inheritance tax, and no personal income tax, the state-level tax variables that complicate this analysis in Hawaii, Vermont, or Rhode Island simply do not exist here. The entire analysis is federal, which makes the practical questions — is the trust’s purpose still live, is the policy performing, does the trustee have a documented process — the whole of the work.
Regulator, Statute, and Verifications
The insurance regulator is the Alaska Division of Insurance, within the Department of Commerce, Community, and Economic Development. It licenses producers and settlement market participants, maintains a licensee lookup, and receives consumer complaints. See Alaska Division of Insurance consumer help.
Alaska’s insurance law is codified at Alaska Statutes Title 21, with viatical and life settlement provisions regulated within that title and implementing rules in the Alaska Administrative Code. We are not asserting a specific chapter and section number. The provisions have been amended, and a planner should pull the current citation from the Alaska Legislature’s statute portal or confirm with the Division before using it in a memo or an opinion letter. Licensing detail is at Alaska life settlement licensing.
Three verifications belong in the trust file for any settlement:
- Licensure of the broker and the ultimate provider, checked against Division records. A trustee who transacts with an unlicensed counterparty has a problem independent of the price obtained.
- Written compensation disclosure from the broker. Under the model framework adopted broadly across the states, a life settlement broker owes a duty to the policy owner — here, the trustee — rather than to the buyer. The disclosure belongs in the file next to the offers.
- The rescission window, which state settlement acts provide for a defined period after receipt of proceeds. Confirm Alaska’s specific period against the current statute and calendar it.
Where the same family also has a Medicaid planning matter running — a common overlap when the insured is in declining health — coordinate with elder law counsel, because a trust-owned policy and an individually owned policy are analyzed under different rules. That side of the analysis is at the Alaska elder law guide.
Frequently Asked Questions
Does the $15 million federal exclusion make every ILIT obsolete?
Only where the trust’s purpose was estate liquidity. Trusts created to fund a buy-sell obligation, equalize among children receiving illiquid assets, or protect a special needs or second-marriage beneficiary may still serve their purpose entirely. Read the instrument for a recital of purpose and ask the settlor if living, rather than assuming the exclusion change is dispositive.
What is the trustee’s actual duty regarding an underperforming trust-owned policy?
At minimum, to know the policy’s condition. Prudent investor principles require monitoring trust property, and the concrete annual step is requesting a current in-force illustration from the carrier at both guaranteed and current assumptions. Case law rewards documented deliberation and does not reliably protect inattention, even where the instrument contains a broad exculpatory clause.
The Crummey notices stopped twenty years ago. How serious is that?
It is a gift tax exposure rather than a trust validity problem. Contributions without valid withdrawal notices may not have qualified for the annual exclusion, meaning returns were understated or unfiled and exclusion was consumed. Given current exclusion levels the consequence is usually manageable, but it should be identified and addressed with the client’s tax counsel deliberately.
Should an Alaska trustee sell the policy or surrender it?
Compare both, along with reducing the death benefit, a 1035 exchange, continuing as drafted, and distributing the policy. Surrender value is a carrier formula; a secondary market price reflects the insured’s current life expectancy and is typically higher where health has declined. What protects the trustee is the documented comparison, not which option was chosen.
Does Alaska tax the trust or the sale proceeds?
Alaska imposes no state estate tax, no inheritance tax, and no personal income tax, so there is no Alaska layer on a settlement gain and no Alaska fiduciary income tax on trust-level income. The analysis is entirely federal, involving IRC § 101, basis under Revenue Rulings 2009-13 and 2009-14, and the § 6050Y reporting regime. Route the computation to the client’s CPA.
How do Alaska’s trust statutes affect the disposition analysis?
Alaska enacted the first domestic asset protection trust statute in 1997 and substantially relaxed the rule against perpetuities, so an Alaska-sited ILIT may have spendthrift and duration features doing work beyond the estate tax purpose. The Alaska Community Property Act also affects basis planning, and a community property trust should be analyzed alongside the ILIT rather than separately.
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Related Reading
- Sell Ilit Trust Owned Policy
- Trustee Duty Underperforming Policy
- Crummey Notices Missing
- Ilit Termination Policy Disposition
- Estate Tax Exemption Change Policy
- Alaska Insurance Department Consumer Help
- Life Settlement Licensing Alaska
- Life Settlement Taxes Alaska
- Elder Law Attorney Life Settlement Guide Alaska
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.