In an estate planning practice, the life settlement question almost never arrives as “should my client sell a policy” — it arrives buried inside a plan amendment, a split-dollar unwind, a buy-sell that outlived the partnership, or an ILIT whose funding assumptions stopped working a decade ago. The drafting attorney is often the only professional in the room who can see that the policy no longer serves the purpose it was bought for.
Michigan-specific context matters at the margins. Settlements here run through the viatical settlement provisions of the Insurance Code, historically cited at MCL 500.2077 et seq. (verify the current citation for 2026), under the Michigan Department of Insurance and Financial Services. Michigan’s flat individual income tax applies on top of the federal treatment described below — as of 2026, confirm the current rate before running numbers for a client. And where long-term care planning is in the background, Michigan’s $2,000 individual countable-asset limit and its $1,500 total-face-value life insurance disregard turn an unneeded policy into a live eligibility issue.
This page is peer-to-peer. It covers the tax mechanics you need at the drafting table, the fiduciary exposure on trust-owned coverage, and how a referral works — with the client’s permission, you send the policy cover page and nothing else. Free review, one to two day turnaround, no obligation. Call (305) 209-7183.
In This Article
- The Three-Tier Tax Structure You Will Be Asked About
- Section 6050Y Reporting Is Not Optional
- Trust-Owned Life Insurance and the Prudent Investor Duty
- Estate-Adjacent Cases Where the Policy Has Outlived Its Purpose
- What the Secondary Market Actually Pays
- Ethics, Disclosure, and Staying in Your Lane
- How a Referral Works
- Frequently Asked Questions
The Three-Tier Tax Structure You Will Be Asked About
Even where the CPA runs the numbers, clients ask the drafting attorney first, so the framework is worth carrying:
- Proceeds up to basis — tax-free return of premium.
- Proceeds between basis and cash surrender value — ordinary income.
- Proceeds above cash surrender value — generally long-term capital gain.
The basis definition improved materially. Rev. Rul. 2020-05 conformed IRS guidance to the 2017 Tax Cuts and Jobs Act, so a seller’s basis is generally total premiums paid without the reduction for cost-of-insurance charges that Rev. Rul. 2009-13 had imposed. That change increases the tax-free tier on most older policies.
Layer Michigan’s individual income tax on the taxable portion and confirm the current rate for the year of sale. Our page on life settlement taxes in Michigan works through the tiers with an example, and clients should confirm their own facts with their tax advisor rather than with counsel.
Section 6050Y Reporting Is Not Optional
A reportable policy sale triggers IRC Sec. 6050Y information reporting. The acquirer reports the acquisition, the issuing carrier reports the seller’s basis, and the seller receives the corresponding information return. Practically, this means two things for the drafting attorney.
First, tell clients before closing that the transaction will be reported and that they should expect the forms — surprise information returns generate panicked calls in the following February. Second, a properly run transaction produces the paper trail your client’s CPA needs to compute basis; an informal or undocumented sale does not. Insist on documented process.
Trust-Owned Life Insurance and the Prudent Investor Duty
Michigan has adopted the Uniform Prudent Investor Act framework within the Estates and Protected Individuals Code and the Michigan Trust Code (confirm current citations before quoting them). A trustee holding a life insurance policy holds an investment asset, and the prudence obligation is the same one that applies to a concentrated equity position: monitor it, document the review, and act when it stops serving the trust purpose.
The specific exposure is narrow and recurring. A trustee who surrenders an underperforming universal life policy for its cash surrender value, without ever testing what the secondary market would have paid, has taken the lower of two available outcomes without a record explaining why. That is the fact pattern a successor trustee or an unhappy remainder beneficiary reconstructs later.
Two drafting fixes are worth considering: express authority in the trust instrument to sell or otherwise dispose of insurance, and a stated annual review obligation that includes a current in-force illustration run at guaranteed assumptions, not just the carrier’s annual statement. Our comparison of life settlement versus surrender frames the record a trustee should build.
| Item | Treatment / Michigan Detail (2026) | Drafting Implication |
|---|---|---|
| Proceeds up to basis | Tax-free return of premium | Basis = total premiums paid (Rev. Rul. 2020-05) |
| Basis to cash surrender value | Ordinary income | Same tier that applies on a surrender |
| Above cash surrender value | Long-term capital gain | The tier surrender never produces |
| Information reporting | IRC Sec. 6050Y on a reportable policy sale | Warn the client; preserve basis documentation |
| Michigan income tax | Flat individual rate applies to the taxable portion — confirm current rate for 2026 | Model state tax alongside federal |
| Trustee duty | Uniform Prudent Investor Act principles under Michigan’s trust code (verify citations) | Document the market test before surrender |
| Settlement regulator | Michigan DIFS; viatical provisions of the Insurance Code (MCL 500.2077 et seq. — verify) | Vet counterparties through DIFS |
| Typical outcome range | ~10–35% of face; ~4–8x surrender value (GAO-10-775) | Give ranges, never a quoted number |
Estate-Adjacent Cases Where the Policy Has Outlived Its Purpose
These recur across estate practices:
- Split-dollar unwinds. When the arrangement terminates, the policy frequently lands with an owner who has no use for it and no appetite for the premium.
- Buy-sell coverage on a retired or bought-out partner. The obligation the policy funded is gone; the premium is not.
- Key-person coverage after a business sale. Often distributed to the insured individually and then quietly allowed to lapse.
- ILITs funded for an estate tax exposure that no longer exists at current exemption levels, where the family is now paying premiums for a liquidity need that evaporated.
- Convertible term nearing the end of its conversion window, which is a hard deadline, not a soft one.
- Policies about to lapse for nonpayment, which is the only category where speed genuinely matters.
The qualifying screen is consistent: insured roughly 70 or older, or any age with a material adverse health change, $100,000 or more of death benefit, and permanent, guaranteed universal life, or convertible term coverage. See what policies qualify.
What the Secondary Market Actually Pays
Pricing is driven by the insured’s age and health, the policy type, the premium schedule required to keep the contract in force, and the carrier. Residency does not price the policy. The federal GAO’s study of the market (GAO-10-775) found sellers typically received roughly 10% to 35% of face value — on average about four to eight times what surrender would have paid.
Resist the temptation to quote a client a number. A responsible answer is that qualification and range can only be established by an actual underwriting review, and that the comparison worth running is settlement versus surrender versus lapse versus reduced paid-up, with real figures in each column. Our explainer on cash surrender value gives clients the baseline they are usually missing.
Ethics, Disclosure, and Staying in Your Lane
The Michigan Rules of Professional Conduct pull in a predictable direction: competence supports knowing the option exists, communication supports raising it before a client destroys value by surrendering or lapsing, and the conflict rules govern any arrangement where you would benefit from the outcome. The safe posture is to identify the asset, describe the market in general terms, refer for an independent review, and let the client decide with their own tax and financial advisors.
Say plainly that the death benefit does not survive the sale, and that heirs relying on that benefit should be part of the conversation where the client wants them to be. Where partial coverage matters, ask about retained-benefit structures — see how the policy options work.
Educational information for professionals only. Nothing here is legal, tax, or investment advice, and it does not create an attorney-client or advisory relationship. Clients should rely on their own independent counsel.
How a Referral Works
The referral is intentionally small. With your client’s written permission, send one document — the policy cover page, meaning the declarations page with the carrier, policy number, face amount, policy type, and issue date. Redact anything you would rather not transmit. Nothing else is needed to open a review.
There is no fee to you or to your client, and no obligation attaches at any stage. An initial read typically comes back within one to two business days with a straight answer on whether the policy is a realistic candidate. If the client wants an indicative range, the file is completed with a current in-force illustration, the latest carrier statement, and a signed HIPAA authorization. A standard file runs roughly 60 to 120 days from application through escrow funding.
Your client controls every decision point and can stop at any time. Nothing changes on the policy until they sign a purchase agreement and funds are placed in escrow. Call (305) 209-7183 to start a free policy review, or point clients to the Education Center first.
Frequently Asked Questions
How are life settlement proceeds taxed for a Michigan client?
Federally, proceeds up to basis are a tax-free return of premium, the amount between basis and cash surrender value is ordinary income, and anything above cash surrender value is generally long-term capital gain. Michigan’s flat individual income tax then applies to the taxable portion; confirm the current rate for the year of sale.
Did the basis rules change?
Yes. Rev. Rul. 2020-05 conformed IRS guidance to the 2017 Tax Cuts and Jobs Act so that a seller’s basis is generally total premiums paid, without the cost-of-insurance reduction required under Rev. Rul. 2009-13. On long-held policies this meaningfully enlarges the tax-free tier.
What is Section 6050Y and does it apply to my client?
IRC Sec. 6050Y imposes information reporting on a reportable policy sale, with reporting obligations on the acquirer and the issuing carrier and an information return to the seller. Tell clients to expect the forms and make sure the transaction is documented well enough for their CPA to compute basis.
Can a trustee sell a policy held in an ILIT?
It depends on the trust instrument’s grant of authority and on beneficiary considerations, both of which should be confirmed before any market test begins. Where authority exists, prudent-investor principles support documenting a comparison of surrender, lapse, retention, and secondary-market value rather than defaulting to surrender.
What is the trustee’s exposure for surrendering without checking the market?
The risk is taking the lower of two available outcomes with no record of why. A surrender that captures cash surrender value when a documented settlement review was never performed is exactly what a successor trustee or remainder beneficiary reconstructs after the fact.
Which estate planning fact patterns most often produce a sellable policy?
Split-dollar unwinds, buy-sell coverage on a retired partner, key-person policies distributed after a business sale, ILITs funded for an estate tax exposure that no longer exists, and convertible term approaching the end of its conversion window. Policies about to lapse for nonpayment are the most time-sensitive.
Should I quote a client an expected sale price?
No. Qualification and value can only be established through an actual underwriting review of the specific policy and insured. Published market data supports a range of roughly 10% to 35% of face value, but that is context for a conversation, not a quote.
What do I actually send to start a review?
With the client’s permission, the policy cover page and nothing else. The review is free, an initial read typically returns in one to two business days, and neither you nor your client takes on any obligation.
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 Vs Surrender
- What Policies Qualify For Life Settlement
- Cash Surrender Value Life Insurance
- How It Works Policy Options
- Life Settlement Taxes Michigan
- 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.