Trust-owned life insurance is the least-monitored asset class on most bank trust platforms, and the prudent investor standard does not contain an exception for it — a policy is trust property, subject to the same duty to monitor, evaluate, and act that governs a concentrated equity position. The reason TOLI review became standard practice is not that the industry grew fastidious; it is that unmonitored policies generated litigation, and the resulting body of case law made “nobody looked at it” an indefensible answer.
This page is written for trust officers and TOLI administrators handling Illinois trusts. It covers the duty framework under the Illinois Trust Code and the prudent investor rule, what belongs in an annual policy review file, the four real disposition options when funding stops, and how to obtain a market indication as part of the record.
Pine Lake Life Solutions provides education and free policy reviews. Nothing here is legal, tax, or investment advice, and none of it substitutes for counsel or for your institution’s own fiduciary review process. Questions: (305) 209-7183.
In This Article
- The Duty: A Policy Is an Asset, Not a Filing Cabinet Item
- What the Annual Review File Should Contain
- When Gifting Stops: The Four Real Options
- Authority, Notice, and the Beneficiary Conversation
- Why So Many ILITs Are Now Over-Insured
- Tax and Regulatory Notes for the File
- How a Referral Works
- Frequently Asked Questions
The Duty: A Policy Is an Asset, Not a Filing Cabinet Item
Illinois adopted the Illinois Trust Code effective January 1, 2020, replacing the Trusts and Trustees Act, and it carries forward the core duties: loyalty, prudent administration, impartiality among beneficiaries, and the duty to keep qualified beneficiaries reasonably informed. Illinois’s prudent investor rule requires a trustee to invest and manage trust assets as a prudent investor would, considering the purposes, terms, and distribution requirements of the trust, and to review trust assets within a reasonable time after accepting the trusteeship and thereafter.
Applied to a life insurance policy, that means the same discipline you would apply to any other holding: know what the contract is, know how it is performing against the assumptions used when it was purchased, know what it costs to sustain, know whether it still serves the trust purpose, and document the review. Fiduciary litigation over unmonitored trust-owned insurance — the line of cases practitioners commonly cite when arguing for a formal TOLI review process, including the well-known Cochran line of authority (verify the specific citations and their current precedential value with counsel before relying on any of them) — turns almost entirely on the absence of a documented process rather than on the merits of any particular decision.
The defensible institution is not the one that made the best call. It is the one whose file shows a review happened, on a schedule, with the alternatives priced.
What the Annual Review File Should Contain
A workable TOLI review produces six things, refreshed annually:
- A current in-force illustration at current assumptions and at guaranteed assumptions, showing the projected lapse age under the actual funding pattern.
- The premium actually being funded versus the premium required to sustain the policy to a target age.
- Carrier financial strength ratings as of the review date.
- Cost-of-insurance history, flagging any carrier-imposed COI increase — these hit a number of older universal life blocks and materially changed sustainability on affected contracts.
- Current cash surrender value and any loan balance.
- A written conclusion: the policy remains appropriate, or it does not, and what action follows.
The single most useful diagnostic is the gap between funded premium and required premium. When the grantor’s gifting slows, that gap opens quietly, and the illustration is the only place it shows up before the policy is in trouble.
When Gifting Stops: The Four Real Options
Grantor fatigue is the standard trigger — the annual exclusion gift arrives late, then partially, then not at all, while the trust keeps sending Crummey notices. At that point the honest option set is short:
- Reduce the face amount so the sustainable premium matches the funding the trust can actually expect.
- Elect reduced paid-up coverage where the contract permits it — a smaller guaranteed death benefit with no further premium.
- Surrender for cash surrender value and redeploy the proceeds inside the trust.
- Test the secondary market and compare the indication against the surrender figure.
In most administrations the fourth option is the one nobody prices, which is exactly why it is worth pricing. Surrender pays the carrier’s contractual formula; the market prices the whole contract based on the insured’s age, health, the death benefit, and the premium stream a buyer would assume. Market-wide historical data — including the federal Government Accountability Office’s study of the market (GAO-10-775) — puts settlements at roughly 10% to 35% of face value and averaging on the order of 4 to 8 times what surrender would have paid. A trustee who surrenders without knowing the market number has made a decision without one of the four data points.
Our side-by-side comparison of a life settlement versus surrender covers the mechanics, and how cash surrender value is computed explains why the two numbers diverge.
| Disposition | Cash to the Trust | Coverage Retained | Prudent Investor Documentation |
|---|---|---|---|
| Continue funding | None; trust outflow continues | Full | In-force illustration showing sustainability at the funded premium |
| Reduce face amount | None | Reduced, sustainably funded | Illustration at the reduced face; beneficiary notice |
| Reduced paid-up election | None | Smaller guaranteed benefit, no further premium | Carrier confirmation of the election and resulting benefit |
| Surrender | Cash surrender value | None | CSV statement; rationale for not testing the market |
| Market sale | Historically ~10-35% of face market-wide (GAO-10-775) | None | Written indications, licensing verification, authority under the instrument, beneficiary notice |
| Lapse by inaction | None | None | No defensible documentation exists for this outcome |
Authority, Notice, and the Beneficiary Conversation
Before pricing anything, read the instrument. Does it grant a general power to sell trust property that reaches insurance? Does it contain insurance-specific provisions, including any exculpatory language purporting to relieve the trustee of a duty to monitor — language that Illinois courts scrutinize and that should never be treated as a reason to skip the review? Is there a trust protector or investment adviser with authority over the policy, and has that role been directed?
Then the notice question. The Illinois Trust Code requires keeping qualified beneficiaries reasonably informed about the administration and the material facts necessary to protect their interests. A disposition of the trust’s principal asset is a material fact. Impartiality also bites here: remainder beneficiaries want the death benefit preserved, income beneficiaries and the grantor may prefer liquidity, and a decision that favors one class without a documented rationale is where surcharge exposure lives. Some institutions obtain beneficiary consents or a non-judicial settlement agreement; some seek court instruction on contested facts. That is a decision for counsel, not for a market participant.
Why So Many ILITs Are Now Over-Insured
A large share of trust-owned coverage was sized against federal estate tax exposure calculated under exemption levels far below current amounts. Federal exemptions rose sharply under the 2017 Tax Cuts and Jobs Act and were extended by subsequent legislation; as of 2026, confirm the current federal basic exclusion amount before concluding a family’s exposure is gone. Many trusts now hold policies insuring against a liability that will never arise.
Illinois trust officers have a wrinkle their peers in other states do not. Illinois imposes its own estate tax with an exclusion amount well below the federal level — long set at $4 million and not indexed for inflation, though you should confirm the current Illinois exclusion and any legislative change with the Illinois Attorney General’s office, which administers the tax, before acting on it. An Illinois family can be entirely clear of federal exposure and squarely inside Illinois exposure, in which case the coverage may still be doing exactly the job it was bought to do. Run the Illinois analysis before you conclude the policy is surplus.
Tax and Regulatory Notes for the File
A sale by the trust generally produces ordinary income on gain up to the excess of cash surrender value over basis and capital gain above that, with basis generally total premiums paid under Revenue Ruling 2020-05 — a change from the older Revenue Ruling 2009-13 treatment that reduced basis by cost-of-insurance charges. The transaction is a reportable policy sale under IRC Section 6050Y, so Forms 1099-LS and 1099-SB will be issued and the trust’s fiduciary return will need to reflect the gain, with Illinois fiduciary and replacement tax implications on top. See life settlement taxes in Illinois, and route the computation to the trust’s tax preparer.
On the regulatory side, Illinois settlements are governed by the Illinois Viatical Settlements Act, 215 ILCS 158, administered by the Illinois Department of Insurance. Verify any counterparty’s licensing standing with the Department and put the verification in the file. Where the trust or beneficiary picture also touches long-term care Medicaid, note that Illinois runs coverage through HealthChoice Illinois MLTSS and the Community Care Program with an individual countable-asset limit raised to $17,500 in 2023 — confirm current figures for 2026 with the Illinois Department of Healthcare and Family Services.
How a Referral Works
Structured to produce a document for your review file rather than a transaction.
- Send the policy cover page, redacted as your policies require, with appropriate authority — carrier, policy type, face amount, issue date, insured’s date of birth.
- Free review in roughly one to two business days, telling you whether the policy is a realistic market candidate. No cost, no obligation, and no contact with the grantor, the insured, or beneficiaries.
- For a written indicative range, four documents: cover page, current in-force illustration, latest carrier statement, and a HIPAA authorization executed by the party with authority to execute it.
- A standard file runs roughly 60 to 120 days from submission through funding, with medical underwriting and the carrier’s ownership-change processing accounting for most of it.
- Funds through independent escrow, ownership transferring only after payment is confirmed. The trustee controls every step and can stop at any point.
Even where the trustee ultimately elects reduced paid-up or surrender, the market indication belongs in the review file — it converts “we did not consider it” into “we priced it and here is why we chose otherwise.” Call (305) 209-7183, or start with our overview of how the process and the policy options work.
Educational only. Not legal, tax, or investment advice, and not an offer to purchase any policy.
Frequently Asked Questions
Does the prudent investor rule really apply to an insurance policy?
Yes. Illinois’s prudent investor standard applies to trust assets generally, and a life insurance contract held by a trust is a trust asset — subject to the duty to review within a reasonable time after accepting the trusteeship and thereafter. The Illinois Trust Code, effective January 1, 2020, carries forward the underlying duties of prudent administration, impartiality, and keeping qualified beneficiaries reasonably informed. Confirm the specific provisions with counsel before applying them to a particular trust.
What belongs in an annual TOLI review file?
A current in-force illustration at both current and guaranteed assumptions, the funded premium compared to the premium required to sustain the policy to a target age, carrier financial strength ratings, cost-of-insurance history including any carrier-imposed increases, current cash surrender value and loan balance, and a written conclusion with the action taken. The gap between funded premium and required premium is the most useful early diagnostic. Refresh it annually rather than at crisis.
Do we need beneficiary consent to sell a policy?
That depends on the instrument and on the notice and consent provisions applicable under the Illinois Trust Code, and it is a question for counsel rather than a market participant. At minimum, a disposition of a principal trust asset is generally a material fact qualified beneficiaries should be informed about. Some institutions obtain consents or use a non-judicial settlement agreement; some seek court instruction where the facts are contested.
Should we test the market even if we plan to surrender?
It is usually worth doing, because the review file then shows that all four options were priced rather than three. Surrender pays the carrier’s contractual formula, while the market prices the contract on the insured’s age and health, the death benefit, and the premium a buyer would assume — historically the two figures diverge substantially. A documented decision to surrender despite a market indication is defensible; an undocumented one is harder to explain.
How much do policies typically bring on the secondary market?
Market-wide historical figures put settlements at roughly 10% to 35% of face value, and the federal Government Accountability Office study of the market (GAO-10-775) found averages of about 4 to 8 times cash surrender value. Individual pricing varies enormously — a heavily funded whole life contract with substantial cash value prices very differently from a guaranteed universal life policy with almost none. No indication is possible without the file.
Does the Illinois estate tax change whether coverage is still needed?
Frequently. Illinois imposes its own estate tax with an exclusion amount well below the federal level — historically $4 million and not indexed for inflation, administered by the Illinois Attorney General’s office — so a family clear of federal exposure can still face an Illinois liability. As of 2026, confirm the current Illinois exclusion and any legislative change before concluding a policy is surplus. The Illinois analysis should be run before the disposition decision, not after.
How is a sale by the trust taxed?
Generally, gain up to the excess of cash surrender value over basis is ordinary income and gain above that is capital gain, with basis generally total premiums paid under Revenue Ruling 2020-05 rather than the reduced basis required by the older Revenue Ruling 2009-13. The transaction is a reportable policy sale under IRC Section 6050Y, so Forms 1099-LS and 1099-SB will be issued. The trust’s fiduciary return and Illinois fiduciary and replacement tax treatment should be modeled by the trust’s tax preparer.
What do you need to produce an indication for our file?
A redacted policy cover page gets a free candidate assessment in about one to two business days at no cost and no obligation. For a written indicative range suitable for a review file, add a current in-force illustration, the latest carrier statement, and a HIPAA authorization executed by the party with authority. There is no contact with the grantor, insured, or beneficiaries, and the trustee controls every subsequent step.
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
- Cash Surrender Value Life Insurance
- How It Works Policy Options
- Education Center
- Life Settlement Taxes Illinois
- Illinois Medicaid Asset Income Limits
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.