The most common life settlement candidate on an Indiana estate planning desk is not a distressed client — it is an irrevocable life insurance trust holding a policy bought to pay an estate tax the client will never owe. The grantor has stopped wanting to make annual exclusion gifts, the trustee is short on premium, and the trust is drifting toward a lapse nobody has formally decided on.
Federal exemption levels after 2025 left a large population of ILITs over-insured relative to their original purpose — verify the exact 2026 exemption amount before you put a number in a memo or a trustee letter. Indiana repealed its state inheritance tax for decedents dying after 2012, so for most Indiana families there is no state-level death tax backstopping the original design either. On the transaction side, life settlements are governed by Indiana Code Chapter 27-8-19.8 and regulated by the Indiana Department of Insurance.
Send a redacted policy cover page. With the trustee’s or grantor’s permission, one page starts the analysis. The review is free, initial turnaround is typically one to two business days, and nothing obligates you or your client. Call (305) 209-7183.
In This Article
- Grantor Fatigue Is the Real Trigger
- The Four Real Options for an Over-Insured ILIT
- Tax Mechanics the Drafting Attorney Should Know
- Transfer-for-Value and the Drafting Traps
- Where This Intersects With Long-Term Care Planning
- Indiana Regulation and Fiduciary Documentation
- How a Referral Works
- Frequently Asked Questions
Grantor Fatigue Is the Real Trigger
Almost no client calls to say the estate plan is obsolete. What happens instead is a slow withdrawal. Crummey notices go out and the gift arrives late. The next year it arrives short. The trustee pays premium from cash value, the illustration deteriorates, and eventually someone asks whether the trust should just stop paying. That question is usually the first time the policy gets examined since it was issued.
By then the drafting attorney is looking at a contract whose purpose has evaporated. The liquidity need it was designed for — a federal estate tax bill, an Indiana inheritance tax that no longer exists, an equalization payment to a child who has since been bought out of the family business — is gone. The asset is still worth something. The default outcome, lapse, is worth nothing.
The Four Real Options for an Over-Insured ILIT
Before a trustee lapses a policy, the option set is short and worth putting in writing: reduce the face amount so the premium fits the gifting the grantor will actually do; convert to reduced paid-up so no further premium is required; surrender for cash value; or test the secondary market and compare that number against surrender. The first three are routinely considered. The fourth is the one that gets skipped, and it is the only one that produces a market-tested price rather than a carrier-set one.
Market-wide, settlement proceeds are commonly cited in the range of 10% to 35% of face value, and the GAO’s 2010 study (GAO-10-775) found proceeds averaged several multiples of cash surrender value. Whether any specific policy prices well depends on the insured’s age and health and on the cost structure of the contract. Our life settlement vs. surrender comparison lays out how the two paths differ mechanically.
Tax Mechanics the Drafting Attorney Should Know
Gain on a policy sale is bifurcated. Proceeds up to the cash surrender value, to the extent they exceed basis, are ordinary income; proceeds above the cash surrender value are generally capital gain. Basis is a friendlier number than it used to be: Rev. Rul. 2020-05 conformed IRS guidance to the 2017 Tax Cuts and Jobs Act change so that a seller’s basis is no longer reduced by cost-of-insurance charges, and is generally total premiums paid.
A reportable policy sale also triggers IRC Section 6050Y information reporting, meaning Forms 1099-LS and 1099-SB will circulate among buyer, issuer and seller. Where a trust is the seller, the trustee will receive forms and the fiduciary return will need to reflect the transaction. None of this is advice on any specific file — loop in the client’s CPA early, and see our Indiana life settlement tax overview for the framework.
| Trustee alternative | Premium going forward | Economic result | Documentation the file should carry |
|---|---|---|---|
| Continue as designed | Full premium | Death benefit preserved | Annual review, current in-force illustration, Crummey notices |
| Reduce face amount | Lower | Smaller benefit, plan survives | Revised illustration, beneficiary notice |
| Reduced paid-up | None | Fixed smaller benefit | Carrier confirmation of the election |
| Surrender | None | Cash surrender value only | Carrier CSV statement; 1099 for gain over basis |
| Life settlement | None | Market price, often above CSV | Market indications, escrow record, Forms 1099-LS and 1099-SB |
| Lapse | None | Nothing | The weakest file a trustee can leave behind |
Transfer-for-Value and the Drafting Traps
The transfer-for-value rule under IRC Section 101(a)(2) is the trap that makes attorneys nervous about moving policies around, and 2017’s reportable policy sale rules narrowed the exceptions that practitioners had relied on. A sale into the licensed secondary market is a reportable policy sale by design and is priced with that in mind; the risk you are managing is more often an intra-family transfer done informally before anyone called counsel.
Two more drafting points worth checking before a trustee acts. First, does the trust instrument actually authorize the sale of a trust asset, or does it only contemplate holding insurance? Second, do the beneficiaries need notice or consent, and is a non-judicial settlement agreement available under the Indiana Trust Code at IC 30-4 rather than a court petition? Those answers shape the timeline as much as the underwriting does.
Where This Intersects With Long-Term Care Planning
Estate planning files age into elder law files. A client who set up an ILIT at 62 is 84 when the care conversation starts, and by then the planning question has changed from estate tax to funding. Long-term care Medicaid in Indiana now runs through Indiana PathWays for Aging, the managed LTSS program launched in 2024, with a $2,000 individual countable-resource limit as of 2026.
If the policy is personally owned rather than trust-owned at that point, its cash surrender value is a countable resource once total face value exceeds the small-face-value disregard — commonly $1,500 across states; confirm Indiana’s current treatment with FSSA. Indiana also runs a Long Term Care Insurance Partnership offering a dollar-for-dollar asset disregard, historically with total asset protection on higher-benefit policies (verify for any specific contract in 2026). A settlement is not a substitute for that coverage; it is a way to monetize the policy the client bought instead of it.
Indiana Regulation and Fiduciary Documentation
Indiana Code Chapter 27-8-19.8 governs life settlement contracts and requires licensure of providers and brokers, with the Indiana Department of Insurance handling licensure, disclosure enforcement, and complaints. Verifying current licensure is a cheap file step. So is confirming that funds will be held by an independent escrow agent and released only when the carrier confirms the change of ownership.
For a corporate or individual trustee, the paper trail is the protection: the in-force illustration, the carrier’s stated cash surrender value, at least one market-tested indication, a written statement of why the policy no longer serves the trust purpose, and the beneficiaries’ notice or consent. That file answers the only question a beneficiary is likely to ask later, which is whether the trustee knew what the asset was worth before disposing of it.
How a Referral Works
You send the policy cover page — redacted as you like — with your client’s or the trustee’s permission. It shows carrier, product type, face amount and issue date, which is enough for a preliminary read. There is no fee and no engagement.
That first read is typically one to two business days. If the policy looks viable, an indicative range needs three more documents: a current in-force illustration, the latest carrier statement, and a signed HIPAA authorization. A standard file then runs roughly 60 to 120 days through funding, which is worth knowing when you are working against a premium due date.
The client and trustee stay in control. They decide whether to proceed, they can stop before closing, and any offer can be reviewed by you and by the client’s CPA first. Call (305) 209-7183 or send the cover page for a free policy review.
This page is educational only and is not legal, tax, or investment advice for you or your client. Pine Lake Life Solutions does not provide legal or tax counsel; independent counsel should review any transaction before it is signed.
Frequently Asked Questions
Can an ILIT trustee sell a trust-owned policy?
It depends on the instrument and on Indiana trust law. Check whether the trust authorizes sale of trust assets generally, whether beneficiary notice or consent is required, and whether a non-judicial settlement agreement under the Indiana Trust Code is available instead of a court petition. Confirm the specifics with counsel for the trust before the trustee acts.
How is the gain taxed on a policy sale?
Proceeds up to the cash surrender value, above basis, are generally ordinary income, and proceeds above the cash surrender value are generally capital gain. Rev. Rul. 2020-05 aligned IRS guidance with the 2017 Tax Cuts and Jobs Act so that basis is no longer reduced by cost-of-insurance charges. Any specific calculation should go to the client’s CPA.
What is Section 6050Y reporting and who gets the forms?
A reportable policy sale triggers information reporting under IRC Section 6050Y. Forms 1099-LS and 1099-SB circulate among the buyer, the issuer and the seller, so the client or trustee should expect to receive forms and should hand them to their tax preparer rather than filing them away.
Does Indiana have an estate or inheritance tax that changes the analysis?
Indiana repealed its inheritance tax for decedents dying after 2012, so for most Indiana families there is no state death tax backing up an ILIT designed for tax liquidity. That is precisely why so many older Indiana trusts are now over-insured relative to their purpose.
Does the transfer-for-value rule kill the income-tax-free death benefit?
The concern under IRC Section 101(a)(2) applies to the buyer’s treatment, and the 2017 reportable policy sale rules narrowed the old exceptions. A sale into the licensed secondary market is structured and priced as a reportable policy sale. The more common problem in practice is an informal intra-family transfer done before anyone consulted counsel.
What kind of policy is worth referring?
Insured roughly 70 or older, or any age with a material health change since issue; death benefit of $100,000 or more; and permanent coverage, guaranteed universal life, or convertible term still inside its window. Policies in force at least two years clear standard waiting-period rules.
Who regulates the transaction in Indiana?
Indiana Code Chapter 27-8-19.8 governs life settlement contracts, with the Indiana Department of Insurance handling provider and broker licensure, disclosure requirements and complaints. Verifying current licensure and independent escrow arrangements is a reasonable step before signing.
How long does the process take?
An initial read on the cover page is typically one to two business days. A full file, from the point the four core documents are gathered through funding, generally runs about 60 to 120 days. Start early if a premium due date or a policy anniversary is driving the calendar.
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Related Reading
- Life Settlement Vs Surrender
- Cash Surrender Value Life Insurance
- Life Settlement Taxes Indiana
- Life Settlement Licensing Indiana
- Indiana Medicaid Asset Income Limits
- 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.