August 7, 2026
2:59 pm

Life Settlements for North Dakota CPAs and Tax Professionals: A 2026 Practice Guide

North Dakota has one of the more specific settlement statutes in the country, and the specificity is in the closing mechanics — which is precisely where a client’s money is most at risk. Chapter 26.1-33.4 of the North Dakota Century Code, the Life Settlements chapter within Title 26.1, requires a provider to pay settlement proceeds into an escrow account within three business days after receiving the transfer documents, and requires the escrow trustee to release funds within three business days of acknowledgment of the transfer or expiration of the rescission period. If the provider fails to tender proceeds by the disclosed date, the contract is voidable by the owner for lack of consideration.

Those are provisions a CPA can actually use. They convert a vague sense that a deal is dragging into a specific, dated failure the client can point to. The chapter also authorizes the Insurance Commissioner to levy civil penalties not exceeding fifty thousand dollars per violation for fraudulent life settlement acts, and requires providers and brokers to be licensed under NDCC 26.1-33.4-02.

On the tax side, the recurring error is not North Dakota-specific: preparers still reduce basis by cost of insurance, a rule Congress repealed in 2017 and made retroactive to transactions after August 25, 2009. This guide is written for the practitioner — the CPA, EA, or tax attorney — and covers the federal computation, the North Dakota rate overlay, and the Medicaid interaction that drives most of these decisions in Fargo, Bismarck, Minot, and the rural counties in between.

In This Article

What NDCC chapter 26.1-33.4 requires, and how to use it
Adjusted basis, and the retroactive repeal
Three characters out of one payment
The North Dakota overlay: a low top rate and a gains deduction
Section 6050Y reporting and transfer for value
209(b) Medicaid and North Dakota’s nursing facility economics
Frequently Asked Questions

Life Settlements for North Dakota CPAs and Tax Professionals: A 2026 Practice Guide

What NDCC chapter 26.1-33.4 requires, and how to use it

The regulator is the North Dakota Insurance Department, led by a separately elected Insurance Commissioner. The substantive law is Title 26.1 of the Century Code, and the Life Settlements chapter is 26.1-33.4. Licensing of providers and brokers runs through section 26.1-33.4-02, and no one should be dealing with a North Dakota resident’s policy without it.

The escrow and payment provisions are the ones with practical teeth. A provider entering a settlement contract must pay the proceeds into an escrow or trust account within three business days after receiving the documents transferring the policy. The trustee must then transfer the proceeds to the owner within three business days of acknowledgment of the transfer by the insurer or the expiration of the rescission period, depending on the sequence. And a failure to tender the proceeds by the date disclosed in the contract makes the contract voidable by the owner for lack of consideration — a remedy that exists precisely because the delay-and-renegotiate tactic is a known failure mode in this market.

Where the insured is terminally or chronically ill, the chapter imposes additional documentation requirements on the provider before the contract is entered. The chapter defines terminally ill as having an illness that can reasonably be expected to result in death in twenty-four months or less, which lines up with the federal threshold in IRC section 101(g). The Commissioner may impose civil penalties up to fifty thousand dollars per violation for fraudulent life settlement acts.

None of that makes you an insurance adviser. It gives you dated benchmarks to hold a transaction against and a clear place to send a complaint. Confirm the current section numbering against the Century Code or with the Insurance Department before you cite it in written advice; chapters get renumbered. Our client-facing page on life settlement licensing in North Dakota covers the same ground for a non-professional reader.

Adjusted basis, and the retroactive repeal

Under Revenue Ruling 2009-13, basis in a life insurance contract was reduced by cumulative cost-of-insurance charges. On a contract in force for decades, that reduction could consume most of the basis, and it produced an incoherent outcome, because the companion surrender ruling imposed no such reduction. A sale was taxed more heavily than a surrender of the identical policy.

Section 13521 of the Tax Cuts and Jobs Act amended IRC section 1016(a)(1)(B) to remove the reduction, retroactive to transactions entered into after August 25, 2009. Adjusted basis is now cumulative premiums paid, less cash dividends received, partial surrenders, and untaxed distributions. Mortality and cost-of-insurance charges do not reduce it.

Getting the number right is a records exercise. Request a complete premium history and the carrier’s stated investment in the contract in writing, and start early — sixty days is not an unusual turnaround on an older contract. Where the policy came through a section 1035 exchange, basis carries over from the surrendered contract and the current carrier’s records generally start at the exchange date; the gap has to be bridged with prior-carrier records. In North Dakota farm and ranch practices there is a related recurring issue: a policy purchased as part of a succession or buy-sell arrangement where the entity paid the premiums and an individual owns the contract, or the reverse. Basis follows the owner, so establish the ownership chain before building a schedule.

Gross up for loans. Where a policy loan is repaid from closing proceeds, the amount realized is the gross settlement price. A $380,000 sale with a $70,000 loan payoff is a $380,000 amount realized against a $310,000 wire, and the Form 1099-LS will report the gross figure.

Three characters out of one payment

The federal split runs in a fixed order. Proceeds up to adjusted basis are a tax-free return of capital. The excess of the policy’s cash surrender value over adjusted basis is ordinary income — the inside build-up the client would have recognized on a surrender, and the character does not change because the exit route changed. Anything above the cash surrender value is capital gain, long-term where the contract was held more than a year, reported on Form 8949 and carried to Schedule D.

Worked: a Bismarck client paid $145,000 in premiums, the cash surrender value at closing is $168,000, and the settlement pays $395,000. Basis recovery is $145,000; ordinary income is $23,000; long-term capital gain is $227,000. Surrendering the same contract would have delivered $168,000 gross with the same $23,000 of ordinary income and no capital gain at all. That $227,000 spread is what does not appear anywhere on a carrier statement, and it is the reason the comparison belongs in the file before a client signs a surrender request.

Term insurance with no cash surrender value collapses the middle tier to zero, leaving basis recovery and capital gain. Where the insured is terminally or chronically ill, the section 101(g) analysis discussed below can remove the transaction from income altogether, which is a different and much better outcome. The client-side comparison is on our page on surrender versus sale.

Item	North Dakota position
Governing statute	NDCC Title 26.1, ch. 26.1-33.4 — Life Settlements
Licensing	NDCC 26.1-33.4-02, providers and brokers
Escrow of proceeds	Into escrow within 3 business days of receiving transfer documents
Release to the owner	Within 3 business days of transfer acknowledgment or rescission expiry
Late payment remedy	Contract voidable by the owner for lack of consideration
Civil penalty ceiling	Up to $50,000 per violation for fraudulent life settlement acts
State income tax	Top marginal rate 2.50%; a deduction for part of net long-term gain has long applied
State estate / inheritance tax	Neither
Medicaid	ND HHS Medical Services Division; North Dakota is a 209(b) state

The North Dakota overlay: a low top rate and a gains deduction

North Dakota’s individual income tax is among the lowest in the country for a state that has one. The 2023 legislative restructuring reduced the rate schedule so that a substantial share of taxpayers pay nothing at the state level and the top marginal rate sits at 2.50%. For a settlement, that means the ordinary income tier carries a modest state cost.

North Dakota has also long allowed a deduction for a portion of net long-term capital gains — the figure commonly cited is forty percent of net long-term gain. If that treatment applies in the client’s year, it further reduces the state cost of the largest tier of a settlement. North Dakota’s income tax has been actively amended in recent sessions, so confirm both the current bracket structure and the availability and percentage of the capital gains deduction with the North Dakota Office of State Tax Commissioner before relying on any published figure. Do not carry forward a rate from a prior-year memo.

North Dakota imposes no estate tax and no inheritance tax. Federally, the exclusion was set at $15 million per decedent for 2026 under the 2025 federal legislation and is indexed thereafter. Together those remove the state-death-tax liquidity argument for keeping an unwanted policy in force.

The timing levers, then, are principally federal. The gain tier is net investment income and can draw the 3.8% tax under IRC section 1411 above the statutory modified AGI thresholds, and a one-year income spike feeds the two-year lookback that sets Medicare IRMAA surcharges on Part B and Part D premiums — a real cost for a client in their seventies that is routinely left out of the analysis. Where a closing date is flexible, model December against January. The client-facing summary is on our page on life settlement taxes in North Dakota.

Section 6050Y reporting and transfer for value

IRC section 6050Y, added by TCJA section 13520 and implemented by final regulations at T.D. 9879, applies to reportable policy sales occurring after December 31, 2018. Two forms, two filers. Form 1099-LS, Reportable Life Insurance Sale, is filed by the acquirer and furnished to the seller and to the issuing carrier, reporting the gross amount paid. Form 1099-SB, Seller’s Investment in Life Insurance Contract, is filed by the issuing insurance company and reports the seller’s investment in the contract and the policy’s surrender amount.

The 1099-SB is the one that supplies tiers one and two, and it is the one clients lose. Request a duplicate rather than estimating. Reconcile the carrier’s investment-in-contract figure against your own reconstruction, because carrier records routinely omit pre-exchange premiums after a 1035 exchange and premiums paid to a predecessor company on an acquired block.

Transfer for value: IRC section 101(a)(2) makes the death benefit taxable to a transferee who acquired the policy for valuable consideration, to the extent it exceeds consideration plus the transferee’s subsequent premiums. TCJA section 13522 added section 101(a)(3), which disables the standard exceptions — carryover basis and transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer — for a reportable policy sale. That is the institutional buyer’s exposure and it is priced in.

Your client’s exposure is the private transaction running alongside it: a child buying a parent’s policy, a farm corporation’s buy-sell being restructured, a policy assigned to an LLC for consideration. Each raises section 101(a)(2) and each deserves a written analysis. In the other direction, IRC section 101(g) excludes amounts received on a sale to a licensed viatical settlement provider where a physician certifies the insured is reasonably expected to die within twenty-four months, and provides a narrower per diem-limited exclusion for chronically ill insureds under section 7702B(c)(2). The provider’s license is a condition of the exclusion, so verify it with the Insurance Department. Our page on what a viatical settlement is explains the distinction for clients.

209(b) Medicaid and North Dakota’s nursing facility economics

North Dakota Medicaid is administered by the Department of Health and Human Services, which absorbed the former Department of Human Services in the 2022 reorganization, with the Medical Services Division handling eligibility and long-term care coverage.

North Dakota is one of the small group of remaining section 209(b) states, permitted to apply eligibility criteria more restrictive than the federal SSI standard in certain respects. Practitioners working from national summaries routinely get the resource limit wrong here; the one-person figure commonly cited for North Dakota is higher than the standard national number, and the methodology differs. Confirm the current limit and the treatment of life insurance with HHS rather than importing a figure from a multi-state chart.

The policy rules themselves are federal. Under 20 C.F.R. section 416.1230, the cash surrender value of life insurance is a countable resource unless the total face value of all policies on the insured is $1,500 or less, in which case the cash value is excluded entirely. Term insurance with no cash value is not a resource. A sale at fair market value is not an uncompensated transfer and does not trigger a penalty under the sixty-month look-back, but the proceeds become a countable resource in the month after receipt — the distinction families most often miss, and the one that turns a solved premium problem into a new eligibility problem. Our page on whether life insurance counts as a Medicaid asset works through the resource treatment.

On cost: North Dakota’s nursing facility rates are high relative to the state’s cost of living, with recent published surveys putting the median semi-private rate in the range of roughly $13,000 to $14,500 per month, placing the state near the top nationally. North Dakota’s rate-setting approach has historically compressed the gap between private-pay and Medicaid rates in a way that is unusual among states; confirm the current rules with HHS before describing them to a client. For your file, request the policy cover page with form number, issue date, face amount, and owner; the most recent in-force illustration; the full premium history; and the current loan balance. Pine Lake Life Solutions provides education and a free policy review and does not purchase policies. We do not give legal, tax, or investment advice — that is your engagement. If a second read on whether a contract would draw market interest would help, the review is free at (305) 209-7183.

Frequently Asked Questions

A client’s settlement proceeds are late. Does North Dakota law give them a remedy?

Yes. Under chapter 26.1-33.4, failure by the provider to tender the settlement proceeds by the date disclosed in the contract renders the contract voidable by the owner for lack of consideration. The chapter also requires the provider to place proceeds in escrow within three business days of receiving the transfer documents. Document the dates, then contact the North Dakota Insurance Department.

Is North Dakota’s Medicaid asset limit the standard national figure?

Not necessarily. North Dakota is one of the remaining section 209(b) states, which may apply eligibility criteria more restrictive than federal SSI rules in certain respects, and the one-person resource figure commonly cited for North Dakota differs from the standard national number. Confirm the current limit and the treatment of life insurance cash value directly with North Dakota Health and Human Services.

Does North Dakota tax the capital gain tier at the full rate?

North Dakota has long allowed a deduction for a portion of net long-term capital gains, commonly cited at forty percent, which reduces the state cost of the largest tier of a settlement. Combined with a 2.50% top marginal rate, the state overlay is modest. North Dakota’s income tax has changed repeatedly, so confirm current-year rules with the Office of State Tax Commissioner.

What penalties can the Insurance Commissioner impose?

Chapter 26.1-33.4 authorizes civil penalties not exceeding fifty thousand dollars per violation for fraudulent life settlement acts or violations of the chapter, alongside licensing consequences for providers and brokers. That gives a client a meaningful complaint path when a counterparty misrepresents the transaction, and it is worth telling a client the path exists before they sign anything.

How should I handle basis for a policy that went through a 1035 exchange?

Basis carries over from the surrendered contract, but the receiving carrier’s records typically begin at the exchange date and will not include premiums paid to the prior company. Request premium histories from both carriers and reconstruct the full figure. This is the single most common cause of understated basis and overstated gain in settlement reporting, and the correspondence is worth the delay.

Can I accept compensation from a broker for referring a client?

You should not. The AICPA Code of Professional Conduct requires disclosure of referral fees and commissions and prohibits commissions with respect to attest clients, and insurance codes in many states separately bar compensating accountants in connection with these transactions. Charge your normal fee for the tax analysis, disclose it in the engagement letter, and take nothing from any party to the sale.

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