The richest source of settlement candidates in an estate planning practice is the over-insured ILIT. Federal estate tax exemption levels after 2025 left a large number of irrevocable life insurance trusts holding policies bought purely to pay an estate tax the client will no longer owe — verify the exact 2026 exemption amount before you put a number in a client memo, since the figure is indexed and subject to legislative change.
Those trusts do not unwind themselves. They sit on the shelf, the annual Crummey cycle keeps running, and the client keeps funding premiums on coverage the estate plan no longer needs. The drafting attorney is usually the only person positioned to notice, because nobody else is reading the trust and the insurance ledger in the same sitting.
Colorado governs these transactions under the viatical settlement provisions in C.R.S. Title 10, Article 7, regulated by the Colorado Division of Insurance. Send a redacted policy cover page for a free market indication — typically one to two business days for a first read, no obligation for you, the trust, or the client. Call (305) 209-7183.
In This Article
- Grantor Fatigue Is the Practical Trigger
- The Over-Insured ILIT Review
- Tax Mechanics the Drafting Attorney Should Know
- Authority, Consent, and the Trustee’s Position
- Colorado Regulatory Framework and Escrow Diligence
- Which Policies in Your Book Actually Price
- How a Referral Works
- Frequently Asked Questions
Grantor Fatigue Is the Practical Trigger
The clinical signal is not a client saying “I want out of this trust.” It is a client who has quietly stopped wanting to make annual exclusion gifts to fund premiums. The gift shrinks, then arrives late, then arrives only after a reminder. Meanwhile the trustee is funding premiums from whatever the trust holds, and the policy drifts toward a place where the original design no longer works.
Catch it at the second reduced funding cycle rather than the fifth. At that point the full menu is still open: reduce the death benefit to a sustainable level, do a 1035 exchange into a product the trust can actually fund, sell the policy, or surrender it. Once the policy enters a grace period, most of those options are gone. Our policy options overview covers the full menu in client-readable language.
The Over-Insured ILIT Review
Pull the trusts drafted when the exemption was materially lower and ask one question: what was this policy bought to do, and does that purpose still exist? A policy bought to fund estate tax liquidity for an estate now comfortably under the exemption has no remaining job. A policy bought for equalization among children, business succession, or a special needs beneficiary may still have a very real one.
Where the purpose is gone, the trust is spending money to preserve a benefit no one needs. That is the conversation to have with the client and the trustee, with a current in-force illustration and a market indication in hand so the discussion is about numbers rather than instincts.
Tax Mechanics the Drafting Attorney Should Know
The characterization on a policy sale is two-tiered. Gain up to the cash surrender value over basis is ordinary income; gain above that is capital gain. Basis after the 2017 Tax Cuts and Jobs Act change is generally total premiums paid, no longer reduced by cost-of-insurance charges — Rev. Rul. 2020-05 conformed IRS guidance to that change, an improvement over the earlier Rev. Rul. 2009-13 treatment.
A reportable policy sale also triggers IRC Sec. 6050Y information reporting, which means Forms 1099-LS and 1099-SB will move among the buyer, the issuer and the seller. Your client will receive forms and will call you about them. Coordinating with the CPA before closing is easier than reconstructing basis afterward. The Colorado tax treatment page is a starting reference, not advice on a specific return.
| Situation in the file | What it usually signals | Drafting attorney’s move |
|---|---|---|
| ILIT drafted when the exemption was far lower | Policy may be funding a tax the estate will not owe | Ask what the policy was bought to do and whether that job remains |
| Annual exclusion gifts shrinking or arriving late | Grantor fatigue; policy is drifting | Review all options while the full menu is still open |
| Trustee funding premiums from trust corpus | Design has quietly changed without an amendment | Get an in-force illustration at guaranteed assumptions |
| Client asks about “just letting it go” | Lapse is on the table and captures nothing | Obtain a market indication before the grace period |
| Sale under consideration | Basis, two-tier gain, and 6050Y reporting all apply | Loop in the CPA before closing, not after |
| Trust instrument silent on disposition | Trustee authority to sell is unclear | Resolve authority and consent before any market test |
Authority, Consent, and the Trustee’s Position
Before any market test, confirm the trust instrument authorizes disposition of the policy and address any beneficiary consent or notice requirements. Running a market test on a policy the trustee cannot sell creates a record without creating an option. Where the instrument is silent, resolve it before the first call.
The trustee also has an independent interest in the record. A trustee who surrenders a policy at cash surrender value without evidence of what the secondary market would have paid is exposed in a way a trustee who obtained an indication and documented the decision is not — even where the decision is to keep the policy.
Colorado Regulatory Framework and Escrow Diligence
Colorado’s framework sits in C.R.S. Title 10, Article 7, administered by the Colorado Division of Insurance, covering licensure, seller disclosures and rescission rights. Two diligence steps belong in every file: confirm licensure through the Division, and confirm that funds sit with an independent escrow agent, released only after the carrier confirms the ownership change.
Where a client’s plan also touches long-term care, note that Colorado’s Health First Colorado long-term care programs apply a $2,000 individual countable-asset limit and that applications are processed through county departments of human services, so timelines vary county to county. See our Colorado licensing overview for the settlement side of the framework.
Which Policies in Your Book Actually Price
The profile that draws funder interest: insured roughly 70 or older, or any age with a material health change since issue; death benefit of $100,000 or more, though ILIT policies are typically far above that; permanent coverage — universal life, guaranteed universal life, whole life — or term still inside its conversion window; and in force at least two years.
Survivorship policies price differently depending on whether both insureds are living and their health picture, and are worth submitting rather than assuming they fail. Policies that generally do not price: small face amounts, expired-conversion term, and healthy insureds well under 70. The qualification screen is the short version.
How a Referral Works
One page starts it: the policy cover page, sent with the client’s or trustee’s permission and redacted as you prefer. Carrier, product type, face amount, issue date — enough for a preliminary read. No fee, no engagement, no obligation for the attorney, the trust, or the client.
If the policy is viable, three more documents produce an indicative range: a current in-force illustration, the latest carrier statement, and a signed HIPAA authorization from the insured. A standard file runs roughly 60 to 120 days from complete documentation through funding, so time the review against the next premium due date.
The client and trustee stay in control throughout and can stop before closing. Send the cover page or call (305) 209-7183.
This page is educational only and is not legal, tax, or investment advice for you, your client, or any trust. Pine Lake Life Solutions does not provide legal or tax counsel.
Frequently Asked Questions
How is gain on a policy sale characterized?
Gain up to the cash surrender value over basis is ordinary income, and gain above that is capital gain. Basis is generally total premiums paid following the 2017 Tax Cuts and Jobs Act change, which Rev. Rul. 2020-05 conformed IRS guidance to. Have the client’s CPA run the actual numbers.
What is IRC Sec. 6050Y reporting and who receives forms?
A reportable policy sale triggers information reporting on Forms 1099-LS and 1099-SB, involving the buyer, the policy issuer and the seller. Clients receive forms and typically ask their attorney what to do with them, so coordinating with the CPA before closing avoids a scramble at filing time.
Are over-insured ILITs really that common?
They are a well-known consequence of exemption levels rising far above where they sat when many trusts were drafted. Policies bought to fund an estate tax the client will no longer owe are the clearest candidates. Verify the current 2026 exemption amount before putting a figure in a client memo.
Can a trustee sell a policy without beneficiary consent?
It depends on the trust instrument and applicable law. Confirm the authority to sell and any consent or notice requirements before a market test begins. Where the instrument is ambiguous, that is a question to resolve first rather than after an offer arrives.
What are the alternatives to selling?
Reducing the death benefit to a sustainable level, a 1035 exchange into a product the trust can fund, using accumulated cash value to carry premiums, or surrender. The right answer turns on whether the beneficiaries still need the death benefit and what the trust can realistically fund.
How much does a policy typically bring?
Commonly cited industry ranges run roughly 10% to 35% of face value, and the GAO’s 2010 report (GAO-10-775) found settlement proceeds substantially above cash surrender value on the policies studied. Pricing depends on age, health, face amount and premium load, so only a current indication is meaningful.
Who regulates life settlements in Colorado?
The Colorado Division of Insurance, under the viatical settlement provisions in C.R.S. Title 10, Article 7. Confirming licensure through the Division and using an independent escrow closing are both reasonable diligence steps.
How long does the transaction take?
About 60 to 120 days from complete documentation through funding on a standard file. Timing the review so a decision lands ahead of the next premium due date keeps the trust from funding coverage it has already decided to dispose of.
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
- How It Works Policy Options
- What Policies Qualify For Life Settlement
- Cash Surrender Value Life Insurance
- Life Settlement Taxes Colorado
- Life Settlement Licensing Colorado
- Education Center
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.