Trust-owned life insurance is the most under-managed asset class on most bank trust platforms, and the reason is structural: the policy arrives with the trust, generates no performance report, and gets reviewed against a carrier’s annual statement that reveals almost nothing about whether the contract is on track. The fix is not complicated. Request an in-force illustration at both guaranteed and current assumptions every year, and treat the result the way you would treat any other holding’s performance data.
The exposure is well known in the industry. Litigation over unmonitored TOLI, including the line of cases involving bank trustees and unreviewed policies often cited as the Cochran v. KeyBank matter, is why policy review became standard practice on institutional platforms. As of 2026, verify citations and current authority with your own counsel before relying on any case in a policy memo.
This page is written for the trust officer administering New York trusts, where fiduciary conduct is governed by EPTL 11-2.3 and where life settlements themselves fall under New York Insurance Law Article 78. It is education, not legal, tax, or investment advice.
In This Article
The Annual Review Packet That Actually Tells You Something
The carrier’s annual statement reports what happened. An in-force illustration projects what will happen, and only the projection surfaces the problem. Request two runs each year: one at current assumptions, one at guaranteed assumptions, both to age 100 or policy maturity, and both at the premium the trust is actually paying rather than the premium originally illustrated.
Read three numbers. The lapse year on the guaranteed column, the lapse year on the current column, and the premium required to carry the policy to a target age. Universal life sold in a higher-rate era routinely fails this test: the current column projects a lapse in the insured’s mid-eighties on the premium the grantor is willing to keep gifting, which means the trust is on track to pay for decades and receive nothing.
Also confirm the basics each year: current death benefit and any option A or B change, outstanding loans and their interest treatment, riders in force, carrier financial strength ratings, and whether the trust’s premium payment mechanics and Crummey notices are actually being executed.
The Four-Option Decision Set
When premiums exceed what the grantor will continue to gift, or when the trust’s purpose has faded, the real choice set has four members: reduce the face amount so the existing funding sustains a smaller benefit; convert to reduced paid-up where the contract allows, ending premiums for a smaller guaranteed benefit; surrender the policy for cash value; or test the secondary market.
In practice only the first three get considered, and the fourth is skipped because nobody on the platform owns it. That asymmetry is the problem, because surrender sets a price without reference to a market and the secondary market is the only option that can exceed it. A no-cost indicative range takes days and turns a default into a documented decision.
Note that a market test is not a commitment. Many policies come back with no offer, which is itself a useful answer that supports surrendering or converting with a clean file.
Prudent Investor Duty Under EPTL 11-2.3
New York’s Prudent Investor Act, EPTL 11-2.3, requires a trustee to pursue an overall investment strategy, to consider the trust’s purposes and the beneficiaries’ circumstances, and to exercise reasonable care, skill, and caution, with an express duty to diversify unless the trustee reasonably determines otherwise. It also permits delegation of investment functions with due care in selection and monitoring.
Applied to TOLI, the practical implications are three. A single carrier’s policy is often a concentrated, illiquid, non-diversified position that requires an explicit rationale. Monitoring means monitoring the contract’s performance, not just its existence. And delegation is available: engaging a qualified third party to review and value the policy is a recognized way to meet the standard, provided the selection and oversight are documented.
Where the trust instrument contains an exculpatory or directed-trustee provision limiting investment responsibility for the insurance, read it carefully with counsel rather than assuming it covers a disposition decision. Those clauses vary widely and courts read them narrowly.
| Annual review item | What to request | Red flag |
|---|---|---|
| Policy performance | In-force illustration at current and guaranteed assumptions | Guaranteed column lapses before life expectancy |
| Funding adequacy | Premium required to carry to age 100 at current premium | Required premium exceeds the grantor’s gift capacity |
| Loans and withdrawals | Loan balance, interest crediting, and effect on death benefit | Loan interest compounding faster than credited value |
| Carrier strength | Current ratings from the major agencies | Downgrade since issue |
| Trust purpose | Written statement of the current liquidity need | No identifiable purpose remains |
| Option set | Reduce, reduced paid-up, surrender, market test | Only three considered; no market indication in the file |
When the Trust’s Purpose Has Expired
Many trusts on the platform were funded to create estate tax liquidity at exemption levels that no longer apply to the family. As of 2026, verify the current federal basic exclusion amount and New York’s separate exclusion and cliff mechanics before summarizing them in a client memo, because both have moved and New York’s cliff can create a genuine liquidity need for a narrow band of estates while leaving others insuring against nothing.
Other purposes expire quietly too: a buy-sell obligation satisfied by a sale, a support obligation to a former spouse that has ended, a special needs beneficiary whose funding plan changed, or a survivorship policy where one insured has died. In each case the trust still holds the asset and the officer still owes a decision.
The conversation with the grantor is usually easier than officers expect, because grantor fatigue is already present. The client has been asking whether they really have to make the gift again this year. The four-option memo answers that question with something other than yes.
New York’s Article 78 Frame for a Sale
If the trust decides to test the market, the transaction is governed by New York Insurance Law Article 78, administered by the New York State Department of Financial Services. Article 78 licenses providers, brokers, and intermediaries; requires written disclosures to the policy owner, which in this case is the trust; addresses advertising and privacy handling of the insured’s medical information; and prohibits stranger-originated arrangements. As of 2026, confirm current requirements, any applicable waiting period, and rescission terms with DFS directly.
Institutional diligence questions: which entity holds the provider license, whether a broker is involved and whose interests that broker represents, what disclosures the trust receives and when, how funds are escrowed at closing, and how the insured’s protected health information is handled after the transaction. Also confirm the insured’s consent process, since the insured and the policy owner are different parties in a TOLI file.
Pine Lake Life Solutions works with New York trust platforms on an educational basis: a free policy review and a plain explanation of options. Nothing on this page is an offer to purchase a trust’s policy, and any transaction would proceed only through properly licensed channels.
Tax and Accounting Follow-Through
A sale by the trust generates reportable policy sale information returns under IRC Sec. 6050Y, meaning the trust will receive Forms 1099-LS and 1099-SB. Federal characterization generally follows three tiers: return of investment in the contract, ordinary income up to cash surrender value, and long-term capital gain above it. The trust’s compressed brackets make the distribution decision consequential, and transfer-for-value under IRC Sec. 101(a)(2) can be live where the policy has moved between parties historically.
Coordinate with the trust’s tax preparer before the transaction closes, not at filing season. On the fiduciary accounting side, be clear on principal versus income allocation for proceeds and on how any premium payments made from income are treated under the instrument and New York’s principal and income rules.
How a Referral Works
With the appropriate authority, send the policy cover page. That alone tells us whether the policy is a candidate. If it fits, three additional documents develop an indicative range: a current in-force illustration, the most recent carrier statement, and a HIPAA authorization from the insured.
The review is free and initial feedback typically returns in one to two business days, which fits inside a normal annual review cycle. A complete transaction generally runs about 60 to 120 days through underwriting, market solicitation, offer, contract, escrow, and carrier change-of-ownership processing. General profile: insured roughly 70 or older, or any age with a material health change; $100,000 or more of death benefit; permanent, guaranteed universal life, or convertible term.
The trustee stays in control at every step, is under no obligation to accept any offer, and can stop before closing. There is no cost to the trust for the review, and we expect any contract to be reviewed by trust counsel and the trust’s tax professional. Free policy review: (305) 209-7183.
Frequently Asked Questions
Does a trustee have a duty to consider selling a trust-owned policy?
New York’s Prudent Investor Act, EPTL 11-2.3, requires reasonable care, skill, and caution in managing trust assets, and insurance is a trust asset. Whether that extends to testing the secondary market in a given case is a legal question for trust counsel, but documenting the full option set is the low-cost way to show diligence.
What should an annual TOLI review include?
An in-force illustration at both guaranteed and current assumptions, the premium required to carry the policy to a target age, loan status, current death benefit and option, carrier ratings, and a written statement of the trust’s remaining purpose.
Can the trustee delegate the policy review?
EPTL 11-2.3 permits delegation of investment functions with due care in selection, establishment of the scope, and periodic monitoring. Engaging a qualified reviewer and documenting the selection is a recognized approach.
Does the insured have to consent to a sale?
In a trust-owned policy the owner and the insured are different parties, and the insured’s authorization is generally required for the medical underwriting that pricing depends on. Confirm current consent requirements under New York Insurance Law Article 78 with counsel.
What tax forms will the trust receive?
Reportable policy sales generate Forms 1099-LS from the acquirer and 1099-SB from the issuer under IRC Sec. 6050Y. Coordinate with the trust’s tax preparer before closing, since compressed trust brackets make the distribution decision consequential.
Who regulates life settlements in New York?
The New York State Department of Financial Services administers New York Insurance Law Article 78, which licenses providers, brokers, and intermediaries and imposes disclosure, privacy, and anti-fraud requirements. Confirm current requirements with DFS as of 2026.
Which trust-owned policies are typically marketable?
Permanent, guaranteed universal life, and convertible term policies with $100,000 or more of death benefit, generally on an insured around 70 or older or any age with a material health change. Survivorship policies are evaluated on both lives.
What does the review cost the trust?
Nothing. The review is free, there is no obligation, and the trustee can stop the process at any point before closing.
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Related Reading
- Cash Surrender Value Life Insurance
- Life Settlement Vs Surrender
- How It Works Policy Options
- Life Settlement Licensing New York
- Life Settlement Taxes New York
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.