TOLI Trustees Should Not Throw Away A Tax Opportunity With The Policy

We have previously written about how changes in the estate tax laws have some grantors questioning their need for a large tax-free death benefit.  We can provide many reasons why retaining a policy still makes sense, but there may be other reasons (bad policy performance, cost of insurance increase, etc.) that necessitate a policy replacement, or even surrender. The IRS allows a tax-free exchange for policies that have a tax gain (when the cash value is greater than cost basis) through a 1035 Exchange – a carrier to carrier transaction that transfers the cash value from the existing policy to a new policy. This method can also be used to move the cash value of life policy tax-free into an annuity.  (1)