Why Use a South Dakota Trust for Life Insurance and Private Placement Life Insurance?

For families using life insurance as part of a long-term estate or investment strategy, where a trust is established can be nearly as important as how the insurance itself is designed.

South Dakota has become one of the leading trust jurisdictions in the country because of its combination of flexible trust laws, privacy protections, long-term dynasty planning, asset protection opportunities, and favorable tax environment. These advantages can be particularly relevant when a trust owns a significant life insurance policy or an investment-oriented strategy such as Private Placement Life Insurance, or PPLI.

The goal is not simply to establish a trust in another state. The goal is to create a structure that can remain flexible, efficiently administered and aligned with a family's wealth-planning objectives for many years, and potentially multiple generations.

Why the State Where Your Trust Is Located Matters

Trust laws vary significantly from state to state. Some states provide considerably more flexibility regarding who can manage trust investments, how long a trust can continue, how confidential trust information can remain, and how an irrevocable trust can be modified as laws and family circumstances change.

South Dakota has developed particularly flexible laws in each of these areas.

For families establishing trusts to own life insurance, those differences can matter because life insurance is typically a very long-duration asset. A policy established today may still be in force decades from now, when family circumstances, tax laws, investment managers and estate-planning objectives may look very different. A good trust structure therefore needs to be built not only for today, but also with flexibility for the future.

Greater Control Through a Directed Trust

One of the most important advantages of South Dakota is its Directed Trust framework. In a traditional trust arrangement, a corporate trustee may be responsible for virtually everything - trust administration, investments and distributions.

A Directed Trust allows those responsibilities to be divided. For example, a family may appoint a corporate trustee to handle trust administration while allowing an investment advisor or investment committee to continue managing the trust's assets. South Dakota law permits the administrative trustee, investment function and distribution function to be separated, giving families more flexibility in determining who is responsible for each role. This can be particularly valuable for sophisticated families that already have established relationships with investment advisors, family offices or other financial professionals.

It can also fit naturally with life insurance. A corporate trustee can provide the institutional administration of the trust while the family's insurance and investment professionals continue to provide expertise in their respective areas.

Why Directed Trusts Can Be Especially Helpful With PPLI

Private Placement Life Insurance (PPLI) is different from traditional life insurance. PPLI is generally designed for qualified purchasers seeking to combine the tax characteristics of life insurance with professionally managed investment strategies. Because the policy is investment-oriented, coordination among the trustee, insurance carrier, investment manager and advisors becomes particularly important.

A South Dakota Directed Trust can create a framework in which those responsibilities are clearly separated. Rather than requiring one institution to perform every role, the trust can potentially maintain the family's preferred investment relationships while a professional corporate trustee oversees the administrative responsibilities of the trust.

That flexibility can be particularly valuable when the trust may continue for decades.

Potential State Tax Advantages

South Dakota does not impose a state individual income tax, which can create important planning opportunities for certain trusts. Depending upon how a trust is structured, where its beneficiaries and trustees reside, where income is sourced and the laws of the family's home state, undistributed trust income may potentially benefit from South Dakota's favorable tax environment.

Properly sitused and administered trusts in a no-income-tax jurisdiction may offer meaningful state tax advantages on retained, non-source income. However, the tax treatment depends on the specific trust structure and the laws of the states connected to the trust, particularly for residents of high-tax states such as California and New York. Appointing a South Dakota trustee alone does not necessarily eliminate another state’s ability to tax the trust. For the right structure, however, trust situs can become another important component of the family's overall tax planning.

A Unique PPLI Advantage: South Dakota Trust for Life Insurance and Private Placement Life Insurance

South Dakota can provide another benefit that is specifically relevant to Private Placement Life Insurance. States generally impose a premium tax when life insurance is issued. Although the percentage can appear small, the dollar amount can become meaningful when a PPLI policy is funded with several million dollars of premium.

South Dakota's insurance premium tax is 8 basis points for premiums in excess of $100,000, and describe a structure through which PPLI may be purchased using a South Dakota LLC.

To put 8 basis points in perspective, that equals 0.08%. On a $10 million premium, for example, 8 basis points represents approximately $8,000. When compared with jurisdictions that impose significantly higher premium taxes, the difference can be meaningful on large PPLI transactions.

The availability and suitability of a South Dakota premium-tax structure should be evaluated with the client's legal, tax, insurance and trust advisors because the appropriate structure depends on the circumstances of the transaction.

The Importance of a Corporate Trustee

An irrevocable life insurance trust requires a trustee. For smaller trusts, families sometimes name a relative, friend or individual advisor. But as the trust becomes larger and more sophisticated, particularly when it owns a substantial life insurance or PPLI policy, the responsibilities can become significant.

A professional corporate trustee can provide continuity and institutional administration over the life of the trust. Responsibilities may include maintaining trust records and accounts, receiving contributions, coordinating distributions, preparing or coordinating tax reporting and following the directions of the appropriate investment or distribution advisors under a Directed Trust structure. A modern Directed Trust places these administrative responsibilities with the administrative trustee while investment and distribution decisions can be allocated to separate committees or advisors.

That separation can be particularly appealing for families that want professional trust administration without giving up relationships with their existing investment advisors.

Bridgeford Trust Company as a South Dakota Corporate Trustee

One option for families considering a South Dakota trust is Bridgeford Trust Company. Bridgeford is an independent South Dakota-chartered trust company with offices in Pierre and Sioux Falls. Its team focuses on trust and fiduciary administration and works with families and their outside legal, tax, investment and financial advisors.

For a life insurance trust, Bridgeford can potentially serve as the South Dakota administrative trustee while other professionals continue to handle investment management, insurance planning and other advisory responsibilities.

That structure can be particularly useful for families that do not want to replace their existing advisory relationships simply because they have selected South Dakota as the situs of their trust.

Flexibility as Families and Laws Change

One of the challenges with any irrevocable trust is that circumstances change. Children grow older. Families expand. Investment strategies change. Tax laws evolve. South Dakota's trust laws offer several mechanisms designed to allow trusts to adapt over time.

For example, South Dakota permits the use of a Trust Protector, who can be given certain powers over the trust and may provide additional flexibility when family circumstances or laws change.

South Dakota also has flexible decanting laws. Decanting can allow assets from an existing irrevocable trust to be transferred into a new trust with updated provisions, subject to applicable legal requirements. Bridgeford describes this as a way for an irrevocable trust to evolve as a family's needs change without necessarily requiring court involvement. For a trust intended to last multiple generations, that flexibility can be extremely valuable.

South Dakota Trusts and Life Insurance: Putting the Pieces Together

For affluent families, the decision to establish a South Dakota trust is ultimately about more than any one tax or legal advantage. It is about creating a durable framework for managing wealth.

When life insurance is part of that framework, several South Dakota advantages can work together:

• Long-term Dynasty Trust planning can help preserve assets for multiple generations.

• Directed Trust laws allow families to separate investment management from trust administration.

• Strong privacy provisions can help protect sensitive family and trust information.

• Trust Protector and decanting provisions can provide flexibility as circumstances change.

• Professional corporate trustees such as Bridgeford can provide continuity and administration.

• For appropriate PPLI transactions, South Dakota's low insurance premium tax may provide an additional economic advantage.

For investment-oriented life insurance strategies in particular, these features can make South Dakota an important jurisdiction to evaluate.

Bringing the Strategy Together

The trust that owns a life insurance policy should receive almost as much consideration as the policy itself. For families using substantial life insurance or Private Placement Life Insurance as part of a long-term wealth strategy, South Dakota offers a combination of flexibility, privacy, multi-generational planning and professional trust administration that can be difficult to replicate in many other states.

Bridgeford Trust Company is one corporate trustee available to families seeking to establish and administer a South Dakota trust while preserving the ability to work with their existing investment, insurance, legal and tax advisors.

The appropriate structure will depend on the family's residence, beneficiaries, assets, estate plan and tax circumstances. For that reason, South Dakota trust planning should be coordinated among the client's estate-planning attorney, tax advisors, corporate trustee and life insurance professionals.

But for families considering significant life insurance or PPLI strategies, trust (ownership) jurisdiction should be part of the planning conversation from the outset. Let’s schedule a call to explore how Private Placement Life Insurance and a South Dakota trust may work together as part of your broader wealth transfer strategy.

The information is for informational purposes only and is not intended as a solicitation.

This material should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor.

Private Placement Life Insurance is an unregistered securities product and is not subject to the same regulatory requirements as registered variable products. As such, Private Placement Life Insurance (or Annuities) should only be presented to accredited investors or qualified purchasers as described by the Securities Act of 1933.

PPLI combines the protection and tax advantages of life insurance with the investment potential of a comprehensive selection of variable investment options. The insurance component provides death benefit coverage and the variable investment component provides you the flexibility to potentially increase the PPVL Account’s surrender and loan value.

These calculations make assumptions as to future investment returns, mortality costs, and administrative expenses and are not guaranteed. Actual results may be higher or lower than illustrated. Loans and partial withdrawals will decrease the death benefit and cash value and may be subject to PPLI limitations and income tax.

The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that TRC Financial is not engaged in rendering tax or legal services. If tax or legal advice is required, you should consult your accountant or attorney. TRC Financial does not replace those advisors.