Premium Tax Planning - Trusts & LLCS/ FLPs

State premium taxes are paid on all insurance premiums in the U.S. These premium taxes vary dramatically among the states. South Dakota has the lowest state premium tax (i.e., 8/100ths of 1% or 8 basis points) in the United States for premium payments in excess of $100,000. The majority of the other states average between 1.75% and 2.5%.  

 

Competitive state premium taxes and modern domestic trust laws, as well as improved domestic regulatory costs and state consumer laws for insurance policies, have resulted in much larger life insurance contracts being issued onshore in South Dakota than with the traditional route offshore. Generally, state premium taxes are imposed on premiums paid for life insurance by the state in which the applicant for the insurance policy is resident, domiciled or sitused. The insured’s resident state does not generally levy a premium tax on the premium paid for a life insurance policy purchased by a trust or a LLC in South Dakota.

An important issue to consider regarding the state premium tax is the retaliatory tax. A retaliatory tax generally allows the state to which the premium tax is paid to impose the premium tax of the state in which the insurance company is located, if that rate is higher. South Dakota by statute does not allow for the opportunity to charge a retaliatory tax for a large case. It is also very important to verify that the domestic insurance companies recognize the low state premium taxes in South Dakota. The lower South Dakota premium tax would apply in this instance. Additionally, South Dakota has very favorable trust, lending and insurance statutes.

Domestic vs. International Insurance Taxes:

There is a one-time tax on the premiums paid into a domestic policy (issued by a U.S. company) called the Federal Deferred Acquisition Cost Tax (“DAC Tax”). The tax calculation is complex, but it essentially equates to 1% of the premiums. The life insurance company pays this tax directly from the premiums paid into a policy.

For international/foreign insurance companies there is a Federal Excise Tax on foreign premiums, which is a one-time 1% tax on premiums paid into an international policy issued. This includes a foreign subsidiary of a U.S. company that has not otherwise filed an election to be treated as a domestic company (a 953(d) election).

Lastly, there are also state premium taxes, as discussed, based on the premium dollars paid into a domestic policy. Many advisors and clients have determined that the .08% South Dakota premium tax is worth the cost of having the policy purchased domestically versus offshore.