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

Trust Law in a Non-UTC State: HRS Chapters 554, 554C, and 554G

Hawaii has not adopted the Uniform Trust Code. Its trust law is assembled from several chapters of the Hawaii Revised Statutes, and a trust officer should know which chapter answers which question:

• HRS chapter 554 — general trust provisions.
• HRS chapter 554A — trustees’ powers, Hawaii’s version of the Uniform Trustees’ Powers Act, which is where the enumerated powers of a Hawaii trustee are found unless the instrument provides otherwise.
• HRS chapter 554C — the Hawaii Uniform Prudent Investor Act. This is the chapter that governs investment conduct, including the portfolio standard, the duty to diversify with its special-circumstances exception, the duty to review trust assets within a reasonable time after accepting the trusteeship, and the rules for prudent delegation.
• HRS chapter 554D — principal and income allocation.
• HRS chapter 554G — the Permitted Transfers in Trust Act, Hawaii’s self-settled asset protection trust statute, enacted in 2010.
• HRS chapter 525 — Hawaii’s adoption of the Uniform Statutory Rule Against Perpetuities, with the familiar 90-year wait-and-see alternative. Hawaii is not a perpetual-trust jurisdiction in the manner of South Dakota or Delaware, which matters when you are projecting how long a trust will hold a contract.

Confirm the current text of any of these before it goes into a memo; Hawaii amends its statutes regularly and chapter organization has shifted over time. The operative point for insurance administration is that chapter 554C is the source of the duty, and 554C contains the same four obligations a trust officer anywhere should be able to recite: care, skill and caution judged against the trust’s purposes; diversification unless special circumstances say otherwise; a review of assets within a reasonable time after accepting the trusteeship; and prudent selection and monitoring of any delegate.

That third obligation — review at acceptance — is the one most often breached in insurance files. A trust department that accepts a successor trusteeship of a 1998 ILIT and never pulls an in-force illustration has an unremediated breach from day one, and it will be the first thing a beneficiary’s counsel asks about.

The Single-Asset ILIT and the Diversification Carve-Out

An irrevocable life insurance trust holds one asset. On its face that is the opposite of a diversified portfolio, and a trust officer who has never thought this through will not have a good answer when asked.

The answer is in the prudent investor framework itself. The duty to diversify is qualified: a trustee may decline to diversify where it reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying. An ILIT is the textbook special circumstance — the trust exists to hold a policy, the settlor funded it for that purpose, and diversifying would defeat the design.

Two conditions attach, and both are frequently missing from real files:

1. The determination must actually be made. “It’s an ILIT” is a description, not a determination. A short memo at acceptance recording that the trust’s stated purpose is to hold and maintain the policy, that the settlor intended concentration, and that the trustee has evaluated and accepted that concentration is the whole requirement. It takes a page.
2. The determination must be revisited. Circumstances change. A trust created to fund estate tax liquidity for a family whose net worth has since fallen below the relevant threshold may no longer be well served by the concentration. A policy that is now projected to lapse before the insured’s life expectancy is a different asset than the one the settlor funded. The concentration is defensible; refusing to look at it is not.

The Hawaii wrinkle is that many Hawaii trusts hold concentrated positions for a related reason — appreciated real property, often held for generations and sometimes with family expectations that it never be sold. A trust department accustomed to documenting a real-property concentration already has the muscle memory for this; apply the same discipline to the policy.

Where a trust concludes that the policy no longer serves the trust’s purposes, the mechanics of disposing of a trust-owned contract are covered at selling a policy owned by a trust. Selling is one of four options and frequently not the right one, but it is an option a trustee should have considered rather than one it did not know existed.

Delegation, Advisers, and What Hawaii Permits

Hawaii’s prudent investor act permits delegation of investment and management functions that a prudent trustee of comparable skills could properly delegate. Delegation is not abdication: the statute imposes duties to exercise reasonable care in selecting the agent, in establishing the scope and terms of the delegation consistent with the trust’s purposes, and in periodically reviewing the agent’s actions to monitor performance and compliance.

For trust-owned insurance, that framework produces a specific set of practices:

• If the trust engages an insurance consultant or adviser, paper the engagement. Scope, deliverables, frequency, and fee. An annual policy review delivered once in 2019 does not satisfy a duty that runs continuously.
• Define what the adviser is and is not deciding. Recommending a course of action and deciding one are different, and the file should be unambiguous about which is happening.
• Keep the deliverables. The consultant’s annual report, with the in-force illustration attached, is the evidence the review occurred.
• Monitor the monitor. If the adviser has produced nothing in eighteen months, that is a failure of the trustee’s duty to review the delegate, not merely the adviser’s failure.

Hawaii instruments also sometimes designate trust protectors or advisers with directive authority. Where the instrument grants directive rather than advisory authority, read it closely and read it early: the scope of a power over “investments” may or may not extend to surrendering or selling an insurance contract, and instruments drafted before the secondary market matured often do not address the question at all. Ambiguity is not resolved by the label on the file.

The failure mode worth internalizing is administrative, not analytical. In Rafert v. Meyer, 290 Neb. 219 (2015), a trustee of an insurance trust did not provide the carrier with a current address; premium notices went undelivered and substantial policies lapsed. The Nebraska Supreme Court held a broad exculpatory clause did not shield the trustee from liability for failing to perform basic administrative duties. It is not Hawaii authority and does not bind a Hawaii court, but it describes the risk precisely — for a trust department administering files across islands and time zones, confirming annually that the carrier holds the correct trustee address and servicing contact is a five-minute task that prevents a catastrophic one.

Item	Hawaii posture (confirm before relying on it)
Trust code	Not a UTC state — HRS chs. 554, 554A, 554D
Prudent investor	Hawaii Uniform Prudent Investor Act, HRS ch. 554C
Self-settled trusts	Permitted Transfers in Trust Act, HRS ch. 554G (2010)
Perpetuities	Uniform Statutory Rule Against Perpetuities, HRS ch. 525 — not a perpetual-trust state
Insurance regulator	Hawaii Insurance Division, Dept. of Commerce and Consumer Affairs, Honolulu
Insurance code	HRS ch. 431; viatical settlements historically at HRS ch. 431E — verify current
State estate tax	Yes — $5,490,000 exclusion, decoupled from federal, graduated to 20%
State inheritance tax	None
State income tax	Yes — up to 11%; Act 46 (2024) phases in bracket changes through the decade
Medicaid agency	Dept. of Human Services, Med-QUEST Division; QUEST Integration managed care
Medicaid individual resource limit	$2,000 (ABD / institutional) as of 2026 — confirm
Life insurance face exclusion	$1,500 aggregate face per insured; above that, full cash surrender value counts
Skilled nursing cost	Roughly $13,000–$15,000/month semi-private in recent surveys — verify facility rate

Reading an In-Force Illustration Like a Fiduciary

The in-force illustration is the only document that tells a trustee whether a policy is going to survive. It should be requested from the carrier in writing every year, at both guaranteed and current assumptions, on every trust-owned contract. It is free. What it is and how to read it is covered at the in-force illustration.

What a fiduciary should extract from it, in order:

1. Projected lapse age at current assumptions. The single most important number in the file.
2. Projected lapse age at guaranteed assumptions. The worst case the carrier is contractually bound to. On many universal life contracts this is dramatically earlier than the current-assumption figure, and a trustee who has only ever seen the current column does not know the trust’s actual exposure.
3. The change from last year’s illustration. A projected lapse age that moved from 98 to 90 in one year is a material adverse event requiring a documented response. This comparison is impossible if you did not order an illustration last year, which is the argument for the annual cycle.
4. The premium required to carry to a target age. Ask the carrier to solve for it. “What annual premium carries this contract to age 100 at current assumptions, and at guaranteed?” is the question that turns a projection into a decision.
5. No-lapse guarantee status. Present or absent; if present, currently intact or forfeited. A guarantee voided by a late or short premium is generally irreversible and changes everything.
6. Outstanding policy loans and the interest accruing on them, which quietly consume the contract from the inside.

The mechanism behind most adverse changes is the internal mortality charge. Beginning around 2015, several carriers raised non-guaranteed cost-of-insurance rates on blocks of in-force universal life, producing a 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. The mechanics are explained at universal life cost-of-insurance increases. A COI increase produces no invoice — it simply accelerates depletion — which is why the illustration comparison, and not the bill, is the detection tool.

Hawaii’s $5.49 Million Estate Tax and Why the ILIT Still Has a Job

Most of the country’s ILIT inventory was created to solve a federal estate tax problem that, for the great majority of families, no longer exists at current exclusion levels. Hawaii is different, and this is the fact that should shape how a Hawaii trust department thinks about its insurance book.

• Hawaii estate tax. Hawaii imposes its own estate tax with an exclusion amount of $5,490,000, decoupled from the federal exclusion, with graduated rates rising to 20 percent at the top bracket. Confirm the current figure with the Hawaii Department of Taxation, because decoupled state exclusions are precisely the kind of number that gets adjusted.
• Inheritance tax. None.
• Income tax. Hawaii’s individual income tax reaches 11 percent at the top bracket, among the highest state rates in the country. Act 46 of 2024 began a multi-year widening of brackets and the standard deduction running through the end of the decade, so the applicable rate in a given year is not the rate from a stale table.

The consequence: a Hawaii family holding an appreciated home on Oahu, a retirement account, and a modest portfolio can cross $5.49 million without feeling wealthy, and the liquidity problem an ILIT was designed to solve is genuinely present. Real property is illiquid, and an estate facing a Hawaii estate tax bill with a house as its principal asset has a real cash-flow problem at a real deadline.

What that means for a trust officer weighing whether a policy still serves the trust’s purposes: run the estate projection before concluding the ILIT is obsolete. In many mainland files the honest answer is that the trust outlived its purpose; in Hawaii that conclusion needs to be earned rather than assumed. The general framework for weighing an ILIT-held policy against a disposition is at life settlements versus ILIT planning, and the state tax overlay at Hawaii life settlement tax treatment.

Where the analysis does point toward disposition, three federal provisions belong in a memo to counsel before anything moves: 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; and the IRC § 6050Y reporting regime, which generates Forms 1099-LS and 1099-SB on a reportable policy sale. None of those is a trust officer’s determination. All three should be raised before a transaction rather than discovered after one.

The Hawaii Insurance Division and HRS Chapter 431E

The regulator is the Hawaii Insurance Division, within the Department of Commerce and Consumer Affairs, led by the Insurance Commissioner and based in Honolulu. It licenses producers, brokers, and settlement providers doing business in Hawaii, and its records are what a trustee should check before allowing any intermediary near a trust-owned contract. Its consumer and licensing functions are summarized at Hawaii Insurance Division consumer help.

Hawaii’s insurance code is HRS chapter 431, and viatical settlement activity has historically been codified in the related article at HRS chapter 431E. Treat that as the chapter to start from rather than a verified current section citation. Hawaii amends its insurance statutes regularly, and a fiduciary memo citing a superseded provision is worse than one citing none. Pull the current chapter text from the Hawaii State Legislature’s statute site, or ask the Insurance Division which chapter and administrative rule apply to the specific transaction. Licensing detail is collected at Hawaii life settlement licensing.

Four verification steps belong in the trust department’s written procedure:

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

One administrative point specific to a multi-island, multi-time-zone practice: notarization, medical authorization, and original-document execution take longer here than a mainland timeline assumes, particularly when a settlor, adviser, or beneficiary is on a neighbor island or on the mainland. Confirm at the outset whether the carrier and any counterparty accept remote online notarization and electronic signatures, rather than discovering the answer at closing.

The Disposition Memo

When a Hawaii trust concludes it will not continue funding a policy 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.

Three numbers should never collapse into one. Cash surrender value is a contractual formula — what the carrier pays to cancel, net of surrender charges. Fair market value is what an informed buyer would pay, driven by the insured’s actual life expectancy, the premium stream needed to keep the contract in force, and the net death benefit. Net death benefit is what the trust collects at maturity, after loans. Where the insured’s health has declined materially since issue, fair market value can exceed surrender value by a multiple, and the divergence runs in one direction only, because a buyer will never pay less than surrender value when the owner could simply surrender instead.

The memo should contain, at minimum:

• The trust’s purposes as stated in the instrument, and whether they are still being served.
• The current in-force illustration at both guaranteed and current assumptions, with the projected lapse ages and the year-over-year change.
• The cash surrender value net of any remaining surrender charge.
• Whether a market indication was sought, from whom, and what it showed — including every offer received and every life expectancy report commissioned. Two reports frequently disagree; retaining only the favorable one is exactly the appearance a fiduciary should avoid.
• The estate projection, given Hawaii’s $5.49 million exclusion, and whether the liquidity purpose survives.
• Beneficiary communications and responses.
• The trustee’s reasoning and the date.

Two closing disciplines. First, beneficiaries have no legal veto over a trustee’s decision — the trust owns the contract — but a remainder beneficiary who first learns of a disposition from an accounting will make the trustee’s life difficult for years. Notify in advance, document the response, proceed. Second, where a current beneficiary may need long-term care, note that Hawaii semi-private skilled nursing has run roughly $13,000 to $15,000 per month in recent surveys, that Medicaid runs through Med-QUEST and QUEST Integration managed care, and that the individual countable resource limit has been $2,000 as of 2026 with life insurance excluded only where aggregate face is at or below $1,500. A trust-owned policy is generally not the beneficiary’s resource; a beneficiary-owned policy generally is. Confirm the standards at Hawaii Medicaid asset and income limits and route the planning question to specialist counsel and to the family’s estate planner — see the Hawaii estate planner guide.

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Frequently Asked Questions

Which Hawaii chapter governs a trustee’s investment conduct?

HRS chapter 554C, the Hawaii Uniform Prudent Investor Act. Hawaii has not adopted the Uniform Trust Code, so its trust law is assembled from several chapters: 554 and 554A for general provisions and trustees’ powers, 554C for investment conduct, 554D for principal and income, 554G for self-settled trusts, and 525 for perpetuities. Confirm current text before citing any of them.

Does holding a single policy violate the duty to diversify?

Not if the trustee determines and records that special circumstances mean the trust’s purposes are better served without diversifying. An ILIT is the textbook case. Two conditions are usually missing from real files: the determination is never actually made in writing, and it is never revisited when circumstances change. “It’s an ILIT” is a description, not a determination.

Why does the ILIT still matter in Hawaii when the federal exclusion is so large?

Because Hawaii imposes its own estate tax with a decoupled $5,490,000 exclusion and graduated rates to 20 percent. A family holding an appreciated Oahu home, a retirement account, and a modest portfolio can cross that threshold without feeling wealthy, and an estate whose principal asset is real property has a genuine liquidity problem at a real deadline. Run the estate projection before concluding the trust is obsolete.

Which number on an in-force illustration matters most?

The projected lapse age at current assumptions, followed immediately by the same figure at guaranteed assumptions — which is often dramatically earlier and represents the trust’s actual contractual exposure. Then compare both against last year’s illustration. A projected lapse age that moved from 98 to 90 in one year is a material adverse event requiring a documented response.

What should the trust department verify before letting an intermediary near a trust-owned policy?

Four things: the Hawaii license of both the intermediary and the ultimate purchaser against Insurance Division records; the compensation disclosure in writing, since a settlement broker generally owes a duty to the policy owner rather than the buyer; the statutory rescission window after closing; and the policy’s provenance and insurable interest at inception, to avoid inheriting a stranger-originated contract.

Is a trust-owned policy a countable resource for a beneficiary seeking Medicaid?

Generally no — the distinction between trust-owned and beneficiary-owned is the one a trust officer must not blur. A policy the beneficiary owns personally is generally countable, subject to the $1,500 aggregate face exclusion above which the entire cash surrender value counts. Where a supplemental or special needs trust is involved, route the analysis to specialist counsel rather than resolving it internally.

Related Reading

• Can I Sell A Policy Owned By A Trust
• What Is An In Force Illustration
• Universal Life Cost Of Insurance Increase
• Life Settlement Vs Ilit Planning
• Hawaii Medicaid Asset Income Limits
• Hawaii Insurance Department Consumer Help
• Life Settlement Licensing Hawaii
• Life Settlement Taxes Hawaii
• Estate Planner Life Settlement Guide Hawaii

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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.