The Estate Planning Attorney’s Guide to Life Settlements in Pennsylvania (2026)

The Fastest Intake: A Redacted Cover Page

If a trust file on your desk holds a policy nobody wants to keep funding, the first step is one document. With the client’s or trustee’s permission, send a redacted policy cover page — carrier, product type, face amount, issue date, insured’s date of birth — to Pine Lake Life Solutions for a free review, or call (305) 209-7183. An initial read comes back in about one to two business days.

No obligation attaches to you, the trustee, or the beneficiaries. This page is educational and is not an offer to purchase any policy.

Orphaned ILITs: The Structural Opportunity

Run a report of trusts your office drafted before the exemption expanded, and look for the pattern: a second-to-die or single-life universal policy, a Crummey letter routine that has become perfunctory, and a grantor in their late seventies or eighties who has started asking why the premiums are still going out.

The choice set the trustee is usually presented with has three options — keep paying, reduce the face amount, or surrender. The fourth, testing the secondary market, is the one that gets skipped, and it is the only one that has ever produced meaningfully more than carrier cash value. GAO-10-775 found sold policies brought roughly four to eight times their surrender value; typical proceeds sit in a 10 to 35 percent range against face amount. Those are market-wide ranges, not a prediction for any specific policy.

Note the corollary for drafting: trust instruments that do not clearly grant the trustee power to sell a policy create a real problem later. Adding express authority to sell, exchange or otherwise dispose of insurance, along with a monitoring standard, costs nothing at drafting.

Trustee Duty: Monitoring Is Not Premium Payment

The Uniform Prudent Investor Act framework applies to a life insurance policy the same way it applies to a concentrated equity position. The trustee must understand what the asset is doing, review it periodically, document the review, and act when the asset no longer serves the trust purpose.

In practice that means obtaining an in-force illustration at least annually or on any material change, knowing the policy’s lapse date at current funding, knowing its stated cash surrender value, and, when disposition is on the table, having at least one market indication in the file. A trustee who can show all four made a documented decision. A trustee who surrendered because the carrier’s form was the easiest paper to sign cannot.

Beneficiary consent is a separate question from trustee authority, and both should be confirmed in writing before any market test begins. Corporate trustees generally have a policy on this already; individual family trustees almost never do, and that is where counsel earns the fee.

Tax Mechanics the Drafting Attorney Should Know

Your client’s CPA owns the analysis, but you should recognize the shape of it. Proceeds up to the policy’s cash surrender value, to the extent they exceed basis, are generally ordinary income. Amounts above the cash surrender value are generally capital gain. Basis is generally total premiums paid; Rev. Rul. 2020-05 conformed IRS guidance to the 2017 tax law change so that basis is no longer reduced by cost-of-insurance charges, a meaningful improvement over the prior Rev. Rul. 2009-13 treatment.

A reportable policy sale triggers IRC Sec. 6050Y information reporting, which means the seller will receive Forms 1099-LS and 1099-SB and will call someone about them. Tell the client in advance that those forms are expected and route them to their CPA.

Where the insured is terminally or chronically ill, IRC Sec. 101(g) may make proceeds income-tax-free when the certification requirements are satisfied — generally a physician certification of 24 months or less for terminal illness. Confirm current requirements for 2026 with the client’s tax advisor.

Trustee option for an unwanted policy	Typical result	Documentation the file should show
Continue paying premiums	Ongoing gift and cash-flow burden; trust purpose may no longer exist	Annual in-force illustration and a stated reason to keep
Reduce face amount	Lower premium, smaller benefit retained	Carrier illustration at reduced face; beneficiary notice
Reduced paid-up / nonforfeiture	No further premium; benefit fixed at a lower level	Carrier nonforfeiture quote
Surrender for cash value	Carrier cash surrender value only	Surrender quote plus evidence the market was tested
Test the secondary market	Historically 4x-8x surrender value (GAO-10-775); no guarantee	At least one market indication in the file before disposition
Let it lapse	Value destroyed entirely	Hardest position to defend on a surcharge petition

Pennsylvania Context You Will Be Asked About

Settlements in Pennsylvania are governed by the viatical and life settlement provisions within Title 40 and administered by the Pennsylvania Insurance Department, which licenses participants and fields consumer complaints. Confirm the current statutory text and any 2026 amendments with the Department directly.

Two Pennsylvania facts shape estate planning conversations even when the file is not a Medicaid file. First, long-term care Medicaid runs largely through Community HealthChoices managed LTSS with an individual countable-asset limit commonly cited at roughly $2,400 (higher, around $8,000, at lower income levels) as of 2026 — verify with the Department of Human Services. Second, Pennsylvania’s filial-responsibility statute at 23 Pa.C.S. Sec. 4603, and the widely discussed Health Care & Retirement Corp. of America v. Pittas decision, give adult children a concrete financial stake in how a parent’s care gets funded. Verify current enforcement posture before characterizing the risk.

Note also that Pennsylvania imposes its own inheritance tax with rates that vary by relationship of the beneficiary. That is separate from the federal exemption question but often the reason a client believed they needed insurance in the first place, and it is worth re-examining in the same review.

Which Trust-Owned Policies Actually Price

The screen is the same as elsewhere in the market. Insured around age 70 or older, or any age with a material adverse health change since issue. Death benefit of $100,000 or more. Permanent, guaranteed universal life, universal life, whole life, or convertible term.

Second-to-die policies price only after the first death in most cases, which is a fact worth flagging to trustees of survivorship ILITs early. Policies carrying large loans may net little after the loan is satisfied. And a policy that still serves a genuine liquidity purpose — a closely held business buy-sell, an illiquid farm or real estate estate, a special needs beneficiary — should stay in force regardless of what it would fetch.

How a Referral Works

You send nothing but the policy cover page, with your client’s or the trustee’s permission. The review is free, an initial read typically returns in one to two business days, and there is no obligation on anyone.

For an indicative range, four documents are needed: the policy cover page, a current in-force illustration, the most recent carrier statement, and a HIPAA authorization for medical records. A standard file that goes to completion generally takes 60 to 120 days, dominated by carrier and underwriting turnaround.

Your client — or the trustee acting for the trust — controls every decision point and can stop at any stage. If the answer is that the policy should stay in force, the file simply closes with a documented review, which is itself worth having.

Building the Review Into Your Practice

The practical version of this is a standing question in your trust review letter: is the trustee satisfied that the policy is performing as illustrated, and has the alternative of a market test been considered and documented? That single line converts an ad hoc favor into a repeatable process and gives the trustee a record.

Keep the disclosure hygiene clean. If you have any relationship with a provider or broker, disclose it in writing under your professional conduct obligations. Route tax questions to the CPA and investment questions to the client’s advisor. Nothing on this page is intended as advice to your client, and any decision should be made with independent counsel of the client’s own choosing.

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Frequently Asked Questions

Why are ILITs the most common source of settlement candidates?

Many were drafted when the federal estate tax exemption was a small fraction of current levels, so the policy was funded to pay a tax the client will no longer owe. The trust purpose evaporated but the premium obligation did not. Verify the exact 2026 exemption figure before quantifying this for a client.

Does the trustee need beneficiary consent to sell a trust-owned policy?

It depends on the trust instrument and the governing law, and the two questions are distinct: whether the trustee has authority to sell, and whether beneficiaries must consent or be notified. Confirm both in writing before any market test begins. Where the instrument is silent, counsel and, in some cases, a court or nonjudicial settlement agreement may be needed.

How is the seller’s basis determined after Rev. Rul. 2020-05?

Basis is generally total premiums paid and is no longer reduced by cost-of-insurance charges, conforming IRS guidance to the 2017 tax law change and superseding the less favorable Rev. Rul. 2009-13 approach. Gain up to cash surrender value over basis is generally ordinary income; gain above cash surrender value is generally capital gain. The client’s CPA should run the actual numbers.

What is IRC Sec. 6050Y reporting and who does it affect?

It is the information-reporting regime for reportable policy sales. The buyer, the issuing carrier and the seller all have roles, and the seller will receive Forms 1099-LS and 1099-SB. Warn the client the forms are coming so the CPA is not surprised at filing time.

Do survivorship policies inside an ILIT settle?

Generally the market prices second-to-die policies after the first death, because pricing depends on the surviving insured’s life expectancy. A survivorship policy with both insureds living is usually not marketable. Flag this early for trustees of survivorship ILITs so expectations are set correctly.

How does Pennsylvania regulate the transaction?

Through the viatical and life settlement provisions within Title 40, administered by the Pennsylvania Insurance Department. The Department licenses participants and handles complaints, and is where a client should verify any company approaching them. Confirm the current text and any 2026 amendments with the Department.

What does it cost the client to find out what a policy is worth?

Nothing. The policy review is free and carries no obligation for the client, the trustee or the referring attorney. The client or trustee controls each decision point and can stop at any stage.

How long does a completed settlement take?

A standard file typically runs 60 to 120 days once the cover page, in-force illustration, current carrier statement and HIPAA authorization are in hand. Most of that time is carrier processing and medical underwriting. Terminal-illness viatical cases usually move much faster.

Related Reading

• Cash Surrender Value Life Insurance
• Life Settlement Vs Surrender
• Life Settlement Taxes Pennsylvania
• Life Settlement Licensing Pennsylvania
• How It Works Policy Options

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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.