South Dakota has one of the lowest state premium taxes in the U.S. for trusts and the lowest for LLCs.
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 versus the traditional route offshore. Most domestic state premium tax planning has involved private placement life insurance (PPLI), versus the more traditional whole and universal life insurance.
State premium taxes are paid on all insurance premiums in the U.S. These premium taxes vary dramatically among the states. Between 2001 and 2016, South Dakota had the lowest premium tax in the U.S. In 2016, South Dakota continued to have one of the lowest state premium taxes for trusts and the lowest for LLCs (i.e. 8/100ths of one percent or eight basis points) in the United States for premium payments in excess of $100,000. The majority of the other states average between 1.75% to 2.5% (for example, California 235 bpts, Connecticut 200 bpts, Florida 175 bpts, Nevada 350 bpts, New Jersey 200 bpts and New York 200 bpts). Most large PPLI policies utilize LLCs, and South Dakota has some of the best supporting insurance laws in the country as well as extensive experience with these types of insurance transactions.
Please see the chart below:
Selected State Premium Taxes:
|New Hampshire||125 bpts.|
|New Jersey||210 bpts.|
|New York||200 bpts.|
|South Dakota||8 bpts. - Both LLCs and trusts|
State premium taxes are imposed on premiums paid for the life insurance by the state in which the applicant for the insurance policy is resident, domiciled or sitused. However, the insured’s resident state will not generally levy a premium tax on the premium paid for the life insurance policy purchased by a trust or a LLC administered in South Dakota with a South Dakota trustee and/or trustee agent. In this instance, there would be a South Dakota owner (e.g. trust or LLC) and the South Dakota premium tax would apply.
Please note, if there are existing trusts in another state and a client wants to purchase PPLI in these trusts sitused outside of South Dakota to take advantage of the lower premium tax in South Dakota, a potential solution is for the client to form a South Dakota LLC with a resident co-managing member in South Dakota, such as South Dakota Trust Company LLC. The resident co-managing member of the LLC in South Dakota can then purchase PPLI within the LLC and allocate the LLC units to the out-of-state trusts, thereby utilizing South Dakota’s low state premium tax with an existing out-of-state trust.
Other Favorable South Dakota Insurance Statutes:
An important issue to consider regarding the state premium tax is the retaliatory tax. A retaliatory tax generally allows the state to whom 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 will honor the low state premium taxes in South Dakota so that the lower South Dakota premium tax is applied.
South Dakota statutes also allow for in-kind distributions of PPLI cash value during lifetime as well as PPLI death benefits. The ability to pay in-kind distributions is very important in the event that the underlying PPLI investments are in hedge funds and/or alternative investments which may have lock up periods of usually three to five years or more. In fact, South Dakota is very unique in that it also allows for in-kind premiums on a case by case basis if approved by the insurance carrier as well as the South Dakota Division of Insurance. Please note tax and legal counsel should also be consulted for such a transaction.
Lastly, South Dakota’s insurable interest statute is one of the best in the country. The statute was drafted in response to the “Chawla Problem.” The statute clarified the insurable interests of the trustee of a trust. For example, the trustee has the same insurable interest that the settlor has including in other individuals. Also, that a trustee has the same insurable interest in a life that a beneficiary might have including in the life of any other individual. Lastly, it should be noted that South Dakota’s favorable insurable interest statutes also extends to LLCs.
Source: Al W. King III and Pierce H. McDowell III, “State Premium Tax Planning,” Trusts & Estates (June 2011) at p. 26. Al W. King III and Pierce H. McDowell III, “Powerful Private Placement Life Insurance Strategies with Trusts,” Trusts & Estates (April 2016) at p. 42. Al W. King III, “The PPLI Solution; Delivering Wealth Accumulation, Tax Efficiency, and Asset Protection Through Private Placement Life Insurance,” Bloomberg Press (2005).