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

Send a Redacted Cover Page Before the Surrender Form

A short screening block, because it is the only action item on this page. With the client’s permission, send the policy cover page — issuing carrier, policy type, face amount, issue date, insured’s date of birth. Redact the policy number if you prefer. The review is free, returns in one to two business days, and tells you whether the policy is likely to clear the secondary market at a price above cash surrender value.

Nothing on this page is an offer to purchase a policy. Pine Lake Life Solutions provides education and free policy reviews; any transaction proceeds only through properly licensed channels appropriate to the client’s circumstances. Review line: (305) 209-7183.

The Estate-Adjacent Cases Where Policies Have Outlived Their Purpose

Four fact patterns recur. First, the irrevocable life insurance trust built when the federal exclusion was a fraction of today’s amount, now holding a policy the grantor is still funding through annual exclusion gifts nobody enjoys making. Second, a split-dollar arrangement being unwound where the rollout leaves an employee or shareholder holding a policy they did not choose and do not need. Third, buy-sell coverage on a retired or bought-out partner, where the entity keeps paying premiums on a person no longer in the business. Fourth, key-person coverage that survived the sale of the company.

In each case the default action is surrender, and in each case the surrender is executed by an administrator, not by counsel. Texas has no state estate tax, which removes one historical reason clients kept marginal coverage in force and makes the "why are we still paying this" conversation more common than it used to be. Building a single question into your policy review checklist — has anyone priced this in the secondary market — captures the value that would otherwise be left with the carrier.

Tax Mechanics the Drafting Attorney Should Know

Three tiers, and they are worth stating precisely because clients repeat them badly. Proceeds up to the owner’s basis are a tax-free return of premium. Proceeds between basis and cash surrender value are ordinary income. Proceeds above cash surrender value are generally long-term capital gain. Revenue Ruling 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 — basis is generally total premiums paid, an improvement over the old Rev. Rul. 2009-13 treatment.

A reportable policy sale also carries information reporting under IRC Section 6050Y, which means the acquirer reports the acquisition and the issuer reports the seller’s basis. Where the insured is terminally or chronically ill and the certification requirements are met, Section 101(g) can render proceeds income-tax free. Confirm all figures and thresholds for the 2026 tax year, and route the actual computation to the client’s CPA rather than opining on it in an engagement letter. Texas imposes no individual income tax, so the analysis is federal, but that does not make it simple.

Trust-Owned Life Insurance and the Trustee’s Affirmative Duty

A trustee governed by prudent-investor principles has a duty to monitor trust assets and to manage them in light of the trust’s purposes. A life insurance policy is a trust asset. Paying the premium on time is administration; determining whether the policy still serves the trust and whether its performance justifies continued funding is investment management. The exposure is not selling a policy — it is surrendering or lapsing one without ever establishing what the market would have paid.

Practical drafting and administration points: confirm the trust instrument actually authorizes sale of trust property including insurance, look at whether beneficiary consent or a non-judicial settlement agreement is appropriate given the beneficiaries’ interests, and build an annual review packet that includes a current in-force illustration run at both guaranteed and current assumptions. The carrier’s annual statement alone hides underperformance in universal life, which is the classic silent failure in older ILITs.

Portion of proceeds	Federal character	Authority / note
Up to owner’s basis	Tax-free return of premium	Basis generally total premiums paid
Basis up to cash surrender value	Ordinary income	Rev. Rul. 2020-05 conformed basis to the 2017 TCJA change (no COI reduction)
Above cash surrender value	Generally long-term capital gain	Holding period rules apply
Terminal or chronic illness sale	Potentially income-tax free	IRC Sec. 101(g), certification requirements must be met
Reporting	Information returns required	IRC Sec. 6050Y reportable policy sale; confirm 2026 forms and thresholds

Texas Rules That Shape the Transaction

Life settlement contracts in Texas are governed by Chapter 1111A of the Texas Insurance Code, regulated by the Texas Department of Insurance. The chapter addresses provider and broker licensing, required disclosures to the owner, protection of the insured’s medical and personal information, and a rescission right after execution. Confirm current text and any 2026 amendments with TDI.

Two other Texas facts commonly intersect with an estate plan built around long-term care. Long-term services and supports run largely through STAR+PLUS managed care, with a $2,000 individual countable-asset limit for long-term care Medicaid as of 2026. And Texas administers a Medicaid Estate Recovery Program that files claims against the probate estates of certain recipients — which is a reason to think about non-probate transfer planning for any proceeds that survive the client. Verify current limits and MERP procedures with Texas Health and Human Services.

Screening Criteria and the Documents That Produce a Number

A case is generally worth pricing when the insured is roughly 70 or older, or any age with a material adverse change in health since issue; the death benefit is $100,000 or more; and the policy is whole life, universal life, guaranteed universal life, or convertible term still inside its conversion period. Corporate-owned and trust-owned policies are routinely marketable, though the ownership documentation adds a step.

Four documents produce an indicative range: the policy cover page, a current in-force illustration, the most recent carrier statement, and a HIPAA authorization signed by the insured. Only the first is needed to open a screening. Standard files run roughly 60 to 120 days from submission to funding — longer where a trust, an entity, or multiple beneficiaries have to sign.

How a Referral Works

You send one document: the policy cover page, with the client’s or trustee’s permission. No medical records, no financial statements, no fee arrangement, no obligation. The review is free and comes back in one to two business days with a straight answer — likely marketable, unlikely, or here is what we would need to know.

From there the client or the trustee controls every decision. They choose whether to proceed, sign the authorizations, review the disclosure package, and retain the statutory rescission window after any contract. Your role is what it already was: confirming authority to sell, documenting the decision process, and making sure the tax consequences are analyzed by the right professional. Free policy review: (305) 209-7183.

Documenting the Decision, Whichever Way It Goes

The value of a market test is not that it always produces a sale. Most policies screened do not clear at an attractive number, and that outcome is itself useful. A file that shows the policy was priced, the offer was compared against cash surrender value and the cost of continuing premiums, and the fiduciary or client chose deliberately is a defensible file. A file that shows a surrender form and nothing else is not.

Memorialize it simply: date of review, what was submitted, the indicative range or the declination, the alternatives considered, and who made the decision. That memo takes ten minutes and answers the question a successor trustee, a beneficiary, or a probate court might ask years later.

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Frequently Asked Questions

How are life settlement proceeds taxed to my client?

In three tiers federally: return of premium up to basis is tax-free, the amount between basis and cash surrender value is ordinary income, and anything above cash surrender value is generally long-term capital gain. Rev. Rul. 2020-05 means basis is generally total premiums paid without reduction for cost of insurance. Confirm current-year treatment with the client’s CPA.

What is IRC Section 6050Y and does it affect my drafting?

It imposes information reporting on reportable policy sales, with the acquirer reporting the acquisition and the issuer reporting basis information. It does not change how you draft, but it does mean your client should expect information returns and should not be surprised. Verify current forms and filing thresholds for 2026.

Can a trustee sell a trust-owned policy without beneficiary consent?

That depends on the trust instrument and applicable trust law. Confirm that the instrument authorizes sale of trust property, review whether beneficiary notice or consent is appropriate, and consider whether a non-judicial settlement agreement fits the situation. The point is to establish authority before a market test begins, not after an offer arrives.

Does surrendering a policy without pricing it create fiduciary exposure?

Prudent-investor principles require monitoring and informed decisions about trust assets. A surrender executed without establishing what the secondary market would have paid is the decision most likely to be questioned later by a beneficiary or successor trustee. Pricing the policy and documenting the comparison protects the fiduciary regardless of the outcome.

Which Texas law governs life settlement contracts?

Chapter 1111A of the Texas Insurance Code, administered by the Texas Department of Insurance, covering licensing, disclosures, privacy of the insured’s information and a rescission right. Confirm current statutory text and any 2026 amendments with TDI before relying on any summary.

Does Texas have a state estate tax or income tax that changes the analysis?

Texas imposes no state estate tax and no individual income tax, so the tax analysis of a policy sale is federal. That also removes one historical reason clients maintained coverage they no longer need, which is part of why these policies sit unexamined in older plans.

What kinds of policies are worth submitting for a review?

Insureds around 70 or older, or any age with a material health change since issue, with $100,000 or more of death benefit on whole life, universal life, guaranteed universal life, or convertible term. Trust-owned and entity-owned policies qualify on the same criteria, with additional documentation of the owner’s authority to sell.

How long does the process take once a client decides to proceed?

Roughly 60 to 120 days from submission to funding for a standard file. Trust-owned or entity-owned cases can run longer because signatures, authority documentation and beneficiary sign-offs add steps. Cases involving certified terminal or chronic illness often move faster.

Related Reading

• Life Settlement Vs Surrender
• Cash Surrender Value Life Insurance
• Life Settlement Taxes Texas
• Life Settlement Licensing Texas
• What Policies Qualify For Life Settlement
• Education Center

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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.