Life Settlements for Delaware Corporate Trust Officers: A 2026 Practice Guide

Why the Delaware File Looks Different: Title 12, Chapter 35

Delaware is not a Uniform Trust Code state. Its trust law is its own, codified at Title 12 of the Delaware Code, chapter 35, and it is built around a principle stated directly in 12 Del. C. § 3303: the terms of the governing instrument generally control, and a settlor may expand, restrict, eliminate, or otherwise vary a trustee’s duties to a degree few other states permit. That principle is the foundation of every Delaware planning structure and it is also the first thing a trust officer must read before applying any default rule.

The provisions that matter most in an insurance file:

• 12 Del. C. § 3302 — the standard of care. Delaware’s prudent-person formulation, applied with reference to the trust’s purposes and the instrument’s terms.
• 12 Del. C. § 3303 — instrument primacy. Read the instrument first. Delaware ILITs routinely contain express provisions relieving the trustee of any duty to investigate the financial condition of the carrier, to determine whether the policy is a proper investment, or to diversify.
• 12 Del. C. § 3313 — advisers and directed trustees. Where the instrument gives an adviser authority, the excluded trustee’s exposure is narrowed to a willful-misconduct standard in the circumstances the statute describes. Section 3313A addresses the relationship between advisers and the trustee further.
• 12 Del. C. § 503 — perpetuities. Personal property held in trust is not subject to the rule against perpetuities in Delaware, while real property held directly in trust carries a 110-year limit. A perpetual trust holding a universal life contract is a very long exposure to rising internal charges.

Those provisions are protective, and they are not self-executing. An instrument that relieves the trustee of a duty to evaluate whether the policy is a proper investment does not relieve the trustee of the duty to forward a lapse notice, maintain a correct address of record with the carrier, or account accurately. Delaware trust officers who read § 3303 as a general amnesty are the ones who end up in Chancery.

Section 3313 and the Narrow Lane of a Directed Trustee

Duemler v. Wilmington Trust Company, decided by the Court of Chancery in 2004, is the case Delaware trust departments cite for the proposition that a directed trustee is not liable for losses arising from an adviser’s decision where the adviser had the relevant information and the trustee acted within its excluded role. It is a genuine and useful authority, and it is narrower than it is often described.

Three questions a Delaware trust officer must be able to answer from the instrument in every directed insurance file:

1. Does the adviser’s authority actually reach this decision? A power over “investment decisions” may or may not encompass surrendering or selling a life insurance contract. Instruments drafted before the secondary market matured frequently do not address it. If the authority is ambiguous, the trustee’s exposure is not resolved by the label on the file.
2. What did the trustee know, and what did it pass along? Carrier statements, lapse notices, rate-change notices, and premium-due reminders generally arrive at the trustee. Forwarding them to the adviser in writing, with a retained transmittal, is the cheapest risk control available. Sitting on a notice showing an imminent lapse while claiming excluded status is not a posture that improves with time.
3. Is the standard willful misconduct, gross negligence, or the default? Read the exculpation language before a direction arrives, not after a loss.

The contrasting authority is Paradee v. Paradee, 2010 WL 3959604 (Del. Ch. Oct. 5, 2010), in which the Court of Chancery found a corporate trustee liable in connection with the administration of a trust-owned policy, including a policy loan arrangement that damaged the trust and inadequate attention to the trust’s affairs over an extended period. The lesson trust officers should take from reading Paradee alongside Duemler is not that Delaware is unfriendly to trustees — it plainly is not — but that the protection attaches to conduct, not to the jurisdiction. A trustee that administers an insurance trust passively for twenty years and produces no review file is not in the Duemler posture regardless of what the instrument says.

The general problem of a trust holding a deteriorating contract is discussed at a trustee’s duty toward an underperforming policy, and the periodic review process at auditing a trust-owned policy.

The In-Force Ledger: What to Pull and How Often

Trust departments that manage insurance well run a ledger, not a file. The ledger is a single schedule covering every trust-owned contract in the department, refreshed on a fixed annual cycle. Minimum columns:

• Carrier, product name, and policy number.
• Chassis: whole life, universal life, guaranteed universal life, indexed universal, variable universal, survivorship, convertible term.
• Insured’s date of birth, and — for survivorship contracts — both insureds and whether the first death has occurred.
• Face amount, current death benefit option, and any outstanding policy loan.
• Current account value, cash surrender value, and any remaining surrender charge.
• Annual premium, mode, next due date, and funding source.
• No-lapse guarantee: present or absent, and if present, whether it is currently intact.
• Projected lapse age at current assumptions and at guaranteed assumptions, from the most recent in-force illustration.
• Date of the last in-force illustration, and the year-over-year change in projected lapse age.
• Adviser of record and the scope of the adviser’s authority.

The single most diagnostic column is the last-but-one: the year-over-year change in projected lapse age. A contract that was projected to carry to 100 last year and to 91 this year has experienced something material — a cost-of-insurance increase, a fall in the credited rate, a missed premium, or a policy loan accruing interest. Any of those requires a documented response. A ledger without that column tells you what the policy is; a ledger with it tells you what is happening to it.

The document that produces those projections is the in-force illustration, which the trustee can request from the carrier in writing at no cost and should request at both guaranteed and current assumptions every year. What it shows and why it matters is at why the in-force illustration matters. Two administrative points that sound trivial and are not: confirm annually that the carrier has the trustee’s correct address and servicing contact, and log receipt of premium notices. The Rafert v. Meyer line of cases — a trustee whose failure to maintain a current address with the carrier let substantial policies lapse — turns on exactly this.

Item	Delaware posture (confirm before relying on it)
Trust code	Not a UTC state — 12 Del. C. ch. 35
Instrument primacy	12 Del. C. § 3303 — settlor may expand, restrict, or eliminate default duties
Standard of care	12 Del. C. § 3302
Directed trusts	12 Del. C. §§ 3313, 3313A — excluded trustee, willful misconduct standard
Perpetuities	12 Del. C. § 503 — no RAP for personal property in trust; 110 years for directly held realty
Key cases	Duemler v. Wilmington Trust (Del. Ch. 2004); Paradee v. Paradee (Del. Ch. 2010)
Forum	Delaware Court of Chancery
Insurance regulator	Delaware Department of Insurance (elected Commissioner), Dover
Insurance code	Title 18, Del. C.; Chapter 75 historically the viatical settlements chapter — verify
Trust income tax	30 Del. C. § 1636 deduction for income accumulated for nonresident beneficiaries
State estate / inheritance tax	Estate tax repealed for deaths after 2017 / no inheritance tax
State income tax	Yes — top marginal rate in the mid-6% range
Medicaid individual resource limit	$2,000 (ABD / institutional) as of 2026 — confirm with DMMA

COI Increases, Carrier Litigation, and the Duty to Notice

Starting around 2015, multiple carriers raised non-guaranteed cost-of-insurance rates on blocks of in-force universal life business. The increases were material on some blocks and triggered a substantial wave of class litigation; the largest resolution to date is the Feller v. Transamerica Life Insurance Co. settlement approved in the Central District of California in 2018 at approximately $195 million. Other carriers faced comparable actions on named product blocks. The background is at cost-of-insurance increase lawsuits.

The fiduciary problem is that a COI increase produces no invoice. It accelerates the depletion of account value silently, and by the time a lapse notice arrives the remedy set has narrowed considerably. For a Delaware perpetual trust holding a universal life contract on a 62-year-old insured, the exposure runs for decades, and the compounding effect of an increase applied early is very large.

Detection, in order of usefulness:

1. The year-over-year projected lapse age. Covered above; this is the primary signal.
2. Account value falling against unchanged premium. Visible on two consecutive annual statements.
3. Carrier rate-change correspondence. Sent, and routinely mistaken for marketing material. Read it and file it.
4. No-lapse guarantee status. A guarantee voided by a late or short premium is generally irreversible and changes the analysis completely. See no-lapse guarantee risk.

When a material adverse change is detected, three responses are defensible and one is not. Increasing premium to restore the original projection, reducing the death benefit to a level the existing funding sustains, or disposing of the contract are all defensible if analyzed. Doing nothing is defensible if analyzed and recorded. Doing nothing because nobody looked is the one posture that has no defense, and it is the most common one.

Where a trust holds a contract that a carrier’s COI action has damaged, note also that the trust may itself be a class member in pending or settled litigation. That is a question for counsel — but the trust officer is the person positioned to notice that the policy number appears on a class list, and noticing is part of the job.

Documenting Surrender vs. Sell — and the Tax Traps

When a Delaware trust concludes it will not continue funding a contract at the current premium, four options exist and a defensible file considers all four: continue funding; reduce the death benefit or move to a paid-up posture; surrender for cash value; or dispose of the contract in the regulated secondary market. The honest comparison between the middle two is at life settlement versus cash surrender value.

Three numbers should never collapse into one in the memo. Cash surrender value is what the carrier will pay to cancel, net of surrender charges — a contractual formula. Fair market value is what an informed buyer would pay, driven by the insured’s actual life expectancy, the required premium stream, and the net death benefit. Net death benefit is what the trust collects at maturity after loans. On an insured whose health has declined since issue, fair market value can exceed surrender value by a multiple, and a rational buyer will never pay less than surrender value because the owner could simply surrender instead. That asymmetry is why the question belongs in the file even when the answer is to keep the policy.

Four tax and structural traps to route to counsel before, not after, a transaction:

• IRC § 2035. A transfer of a policy by the insured within three years of death pulls the death benefit back into the gross estate. Any transaction touching ownership needs this analysis.
• IRC § 101(a)(2) transfer for value. A transfer of a policy for valuable consideration can convert a tax-free death benefit into ordinary income, with exceptions including transfers to the insured and, under Rev. Rul. 2007-13, transfers between grantor trusts treated as owned by the same person.
• Seller-side basis. The Tax Cuts and Jobs Act of 2017 reversed the basis-reduction rule of Rev. Rul. 2009-13 for life settlement transactions, retroactive to sales after August 25, 2009, so basis is generally no longer reduced by cost-of-insurance charges. The framework is at life settlement tax basis.
• IRC § 6050Y reporting. Reportable policy sales generate Forms 1099-LS and 1099-SB under regulations finalized in 2019. A trustee should know these will arrive and who is responsible for filing.

One Delaware-specific planning note: under 30 Del. C. § 1636, Delaware permits a deduction for trust income accumulated for the benefit of nonresident beneficiaries, which is a principal reason Delaware situs is chosen. Whether a particular receipt qualifies is the trust’s accountant’s determination, not the trust officer’s. Delaware does impose a personal income tax with a top marginal rate in the mid-6 percent range, and it repealed its estate tax for deaths after 2017 with no inheritance tax. See Delaware life settlement tax treatment.

The Delaware Department of Insurance and Title 18

The regulator is the Delaware Department of Insurance, headed by the elected Insurance Commissioner, in Dover. It licenses producers, brokers, and settlement providers doing business in the state, and its records are what a trustee should check before permitting any intermediary to touch a trust-owned contract. Its consumer and licensing functions are summarized at Delaware Department of Insurance consumer help.

Delaware’s insurance law is codified at Title 18 of the Delaware Code, with regulations in Title 18 of the Delaware Administrative Code. Viatical and life settlement activity is regulated within that title, and Chapter 75 has historically served as the viatical settlements chapter. Treat that as historical rather than as a verified current citation. Delaware amends its insurance code regularly, and a fiduciary memo citing a superseded chapter is worse than one citing none. Pull the current chapter from the Delaware Code online or confirm with the Department before the citation goes into the file. Licensing detail is at Delaware life settlement licensing.

Four verification steps that belong in a trust department procedure:

1. Confirm licensure of both the intermediary and the ultimate purchaser against Department records. An unlicensed counterparty ends the process.
2. Obtain the compensation disclosure in writing. In most jurisdictions a settlement broker owes a duty to the policy owner rather than to the buyer, and the commission is disclosable. A trustee that cannot state what the intermediary was paid has an incomplete file.
3. Calendar the statutory rescission window that runs after closing, confirming its length against Delaware’s current statute.
4. Confirm provenance and insurable interest at inception. A contract with a suspect origin raises stranger-originated life insurance questions the trust does not want to inherit; see stranger-originated life insurance.

When a Beneficiary Enters Care: The Numbers That Enter the File

Trust departments in Delaware increasingly administer trusts whose current beneficiary is elderly and may require long-term care, and at that point a set of numbers that never mattered before starts to matter.

Recent cost surveys have placed Delaware semi-private skilled nursing in the range of roughly $12,000 to $13,000 per month; verify a specific facility’s rate rather than relying on a median. Delaware delivers Medicaid long-term services and supports through Diamond State Health Plan Plus managed care, with eligibility determined by the Division of Medicaid and Medical Assistance within the Department of Health and Social Services — which means financial eligibility, level of care, and plan enrollment are three separate steps, each with its own timeline.

Two figures a trust officer should have at hand before making a discretionary distribution to a beneficiary who may seek benefits:

• Individual countable resource limit: $2,000 for aged, blind, and disabled and institutional Medicaid as of 2026. Confirm with DMMA. Current standards are at Delaware Medicaid asset and income limits.
• Life insurance exclusion: total face value at or below $1,500 per insured is excluded; above that, the entire cash surrender value counts. A beneficiary-owned policy, as distinct from a trust-owned one, is squarely a countable resource question.

The critical distinction — and the one trust officers must not blur — is between a policy owned by the trust and a policy owned by the beneficiary personally. The former is generally not the beneficiary’s resource; the latter generally is. Where a trust is a supplemental or special needs trust, distributions and asset ownership interact with benefit eligibility in ways that require specialist counsel; the shape of that problem is discussed at a special needs trust holding a policy.

Finally, a discipline point. A trustee who is asked by a family to “just cash in the policy so Mom can pay the nursing home” is being asked to make a fiduciary decision under emotional pressure and on someone else’s timeline. The answer is the same as always: pull the in-force illustration, run the four-option analysis, determine whether a market indication is available, notify the beneficiaries, document the reasoning, and then decide. Speed is not a defense to a surcharge claim, and a well-papered decision made in three weeks beats a fast one made in three days.

---

Frequently Asked Questions

Does 12 Del. C. § 3303 relieve a trustee of all duties regarding a trust-owned policy?

No. Section 3303 gives the governing instrument extraordinary primacy, and Delaware ILITs commonly relieve the trustee of duties to investigate the carrier, evaluate the policy as an investment, or diversify. It does not relieve the trustee of forwarding a lapse notice, maintaining a correct address of record with the carrier, or accounting accurately. Reading it as a general amnesty is how trust departments end up in Chancery.

How far does Duemler actually protect a directed trustee?

Duemler v. Wilmington Trust (Del. Ch. 2004) supports the proposition that an excluded trustee is not liable for an adviser’s decision where the adviser had the relevant information and the trustee stayed within its role. Read alongside Paradee v. Paradee (Del. Ch. 2010), the lesson is that the protection attaches to conduct, not to the jurisdiction. Passive administration with no review file is not the Duemler posture.

What is the single most diagnostic entry on an in-force ledger?

The year-over-year change in projected lapse age. A contract projected to carry to age 100 last year and to 91 this year has experienced something material — a cost-of-insurance increase, a lower credited rate, a missed premium, or an accruing policy loan. A ledger without that column tells you what the policy is; with it, you learn what is happening to the policy.

Which tax provisions should a Delaware trust officer route to counsel before a policy transaction?

IRC § 2035, which pulls a policy back into the gross estate on a transfer by the insured within three years of death; IRC § 101(a)(2), the transfer-for-value rule, with its exceptions including transfers between grantor trusts under Rev. Rul. 2007-13; the seller-side basis rules as changed by the 2017 Tax Cuts and Jobs Act; and the § 6050Y reporting regime producing Forms 1099-LS and 1099-SB.

Which Delaware chapter governs life settlement transactions?

Delaware’s insurance code is Title 18 of the Delaware Code, and Chapter 75 has historically served as the viatical settlements chapter. Treat that as historical rather than verified current, because Delaware amends its insurance code regularly and a superseded citation in a fiduciary memo is worse than none. Confirm the current chapter with the Department of Insurance before filing the memo.

A family wants us to surrender a policy immediately to pay a nursing home bill. What is the right answer?

The same as always, on the trustee’s timeline rather than the family’s. Pull a current in-force illustration at both assumption sets, run the four-option analysis, determine whether a market indication is available, notify the beneficiaries, document the reasoning, then decide. Speed is not a defense to a surcharge claim. A well-papered decision in three weeks beats a fast one in three days.

Related Reading

• Trustee Duty Underperforming Policy
• Audit Of A Trust Owned Policy
• Cost Of Insurance Increase Lawsuit
• In Force Illustration Why It Matters
• Life Settlement Vs Cash Surrender Value
• Life Settlement Licensing Delaware
• Life Settlement Taxes Delaware
• Delaware Medicaid Asset Income Limits
• Delaware Insurance Department Consumer Help

---

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.