Life Settlements for North Dakota Estate Planners: A 2026 Practice Guide

What a North Dakota File Usually Contains

The recurring composition:

• Farm or ranch land held in a family entity — commonly an LLC or a closely held corporation formed in the 1980s or 1990s — carrying appreciation that dwarfs the operation’s income.
• A buy-sell agreement among siblings or between generations, funded by life insurance, drafted when the estate tax exclusion was under $1 million.
• An irrevocable life insurance trust holding a second-to-die or single-life policy, created for estate liquidity.
• An orphaned corporate policy on a retired officer or a former partner, still in force, premiums still drafting.
• Mineral interests, in much of the western part of the state, which complicate valuation and can spike an estate’s value unpredictably.

Two structural facts frame the analysis. First, North Dakota’s estate tax provisions are tied to the federal credit for state death taxes, which was phased out federally, so no North Dakota estate tax is currently imposed and there is no separate inheritance tax. Second, the federal basic exclusion is $15 million per decedent for 2026, indexed, with portability available on a timely-filed federal return.

The consequence is that the estate tax purpose behind nearly all of this insurance has ended for the overwhelming majority of North Dakota families — but the contracts, obligations, and premium notices have not. The planning work is disposition work, and it is worth doing deliberately rather than by lapse.

Connelly and the Redemption-Funded Buy-Sell

In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court held unanimously that life insurance proceeds a corporation receives to fund its obligation to redeem a deceased shareholder’s stock increase the corporation’s fair market value for estate tax purposes, and that the redemption obligation is not an offsetting liability that reduces that value. The decision resolved a split and displaced the contrary reasoning that had followed Estate of Blount v. Commissioner in the Eleventh Circuit.

The practical effect on a legacy North Dakota buy-sell:

1. Entity-redemption structures now inflate the decedent’s estate by the amount of the insurance proceeds attributable to the decedent’s ownership share. Agreements drafted on the assumption that the obligation offset the proceeds are wrong as to that assumption.
2. Cross-purchase structures do not have this problem, because the policies are owned by the surviving owners rather than by the entity. That is the standard restructuring response, and it raises its own issues — policy count grows with the number of owners, and moving existing policies between owners implicates the transfer-for-value rules of IRC § 101(a)(2).
3. For most North Dakota families the exposure is academic at a $15 million federal exclusion. But it is not academic for a family whose land and minerals have appreciated into eight figures, which describes more western North Dakota families than it did fifteen years ago.

The threshold question is prior to all of that: does the agreement still describe the business? Partners have been bought out, children have left the operation, entities have merged. Where the agreement is obsolete, the insurance funding it is obsolete too, and the analysis moves to disposition. The pattern is discussed at when a buy-sell agreement no longer needs its policy. Read Connelly itself rather than a summary before advising on a restructuring; the opinion is short and the reasoning matters.

Anti-Corporate Farming and the Entity Constraint

North Dakota restricts corporate and limited liability company ownership of farmland and ranchland, permitting it principally through family farm corporations and family farm limited liability companies meeting statutory requirements — a framework codified in Title 10 of the North Dakota Century Code. Confirm the current requirements and any recent amendments with counsel, because this area has seen repeated legislative and litigation activity.

Why it matters to an insurance question: the permitted-entity rules constrain how ownership can be restructured, who can hold an interest, and what a buy-sell can actually accomplish. A restructuring from entity redemption to cross-purchase that would be routine in a state without these restrictions may run into ownership eligibility limits here. Similarly, a plan that contemplates an outside party acquiring an interest on a family member’s death may not be executable.

Two practice points follow.

Do not design the insurance fix before confirming the entity fix is permissible. Sequence it: determine what the entity structure can legally become, then determine what funding that structure requires, then determine what to do with the existing policies.

Consider whether the liquidity need is real at all. Federal law provides tools for illiquid farm estates independent of insurance — special use valuation under IRC § 2032A, installment payment of estate tax attributable to a closely held business interest under IRC § 6166, and the qualified conservation easement exclusion under IRC § 2031(c). Where a family qualifies for these, the case for continuing an expensive policy weakens considerably. Where they do not, it strengthens. That analysis belongs with the client’s tax counsel, and it should precede the disposition decision rather than follow it.

Where the policy sits	Threshold question	Principal legal trap
Entity-redemption buy-sell	Does the agreement still describe the business?	Connelly (2024): proceeds raise entity value; obligation does not offset
Family farm LLC or corporation	What ownership structure is permissible?	North Dakota entity ownership restrictions on farmland
Irrevocable life insurance trust	Is the liquidity purpose still live?	Dormant Crummey record; trustee inattention
Key-person or company-owned	Who owns it now, per the carrier?	IRC § 101(j) notice and consent; Form 8925 reporting
Any in-kind transfer	Does an exception apply?	IRC § 101(a)(2) transfer-for-value; § 2035 three-year rule

The ILIT Side: Dormant Files and Trustee Duty

The typical North Dakota ILIT was created for estate liquidity, holds one policy, names a family member as trustee, and has had no activity recorded since the year after it was signed.

Crummey records. Withdrawal rights derived from Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), are what made annual contributions present-interest gifts eligible for the gift tax annual exclusion. The file should show, per year and per power holder: written notice of the contribution and the withdrawal right, a genuine window in which to exercise it, evidence of delivery, and contributions running through the trust’s own account before premiums are paid. In practice most files go silent after two or three years, and frequently the settlor has been paying the carrier directly. The exposure is a gift tax exposure — contributions that may not have qualified, returns understated or unfiled, exclusion consumed — rather than a defect in the trust. At current exclusion levels it is usually manageable, but it should be surfaced with the client’s tax counsel deliberately rather than discovered later.

Trustee duty. A trustee holding a life insurance contract holds an investment, which is a framing most family trustees have never had explained. North Dakota has enacted a version of the Uniform Trust Code, codified in Title 59 of the North Dakota Century Code; confirm the current chapter and the applicable prudent investor provisions rather than relying on a description. The operative duty is to know the condition of trust property and to exercise reasoned judgment about retaining or disposing of it.

The general lesson from ILIT trustee litigation across jurisdictions is consistent: broad exculpatory clauses have not reliably protected trustees whose policies lapsed through inattention, while trustees who made documented, reasoned decisions have generally been upheld even where the result looked poor in hindsight. Process is what is judged. The framework is at a trustee’s duty regarding an underperforming policy.

The concrete annual step: request a current in-force illustration from the carrier in writing, at both guaranteed and current assumptions, and file it with a one-page memo. For guaranteed universal life, ask explicitly whether the no-lapse guarantee is intact and to what age — a late or reduced premium can compromise it, sometimes irreversibly.

Key-Person and Company-Owned Policies Nobody Owns Anymore

These are the easiest wins in a North Dakota file and the most frequently overlooked.

The retired key person. A grain elevator, an implement dealership, a bank holding company, or a construction firm insured a general manager in 1994. The manager retired in 2011 and the policy is still in force with the company paying premiums, because the payment is on autopay and nobody reviews the general ledger line. The company holds an asset it does not need, and it has been buying it for fourteen years. The pattern is at a key-person policy on a retired executive.

The sold business. Where the operating business was sold and the corporate-owned policies were retained by the seller entity — or, worse, were simply forgotten in the asset schedule — the contracts may be orphaned. Determine current ownership from the carrier’s records rather than from anyone’s recollection. The issue is developed at company-owned policies after a business sale.

Three items to check on any corporate-owned contract before disposing of it:

• Employer-owned life insurance notice and consent. IRC § 101(j), enacted in 2006, conditions the income tax exclusion for death benefits on employer-owned contracts on satisfying notice-and-consent requirements before issue and on annual reporting on Form 8925. Contracts issued after August 17, 2006 that failed those requirements have a problem that affects valuation, and it should be identified before a transaction, not after.
• Transfer-for-value. IRC § 101(a)(2) can convert a tax-free death benefit into ordinary income when a policy is transferred for consideration, subject to exceptions including transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer. Moving a policy between related entities is exactly where this arises.
• Corporate authority. Confirm who is empowered to sign a change of ownership — the operating agreement or bylaws, not the family’s assumption.

Six Disposition Paths and the Transfer-for-Value Trap

Once a purpose has ended, six paths exist. Write the comparison memo even when the conclusion is to change nothing; the memo is what protects the fiduciary or the officer who signs.

1. Continue as drafted. Right where a live purpose remains and the premium is sustainable.
2. Reduce the death benefit or elect a nonforfeiture option. Trades face amount for the end of the funding obligation.
3. Section 1035 exchange into a contract with better guarantees or a lower cost structure. Preserves deferral; generates no cash; does not extinguish an outstanding policy loan cleanly.
4. Surrender for cash value. Simple, and often the worst economic outcome where the insured’s health has declined, because a carrier’s cancellation formula ignores mortality entirely.
5. Secondary market sale. Typically the highest cash figure for an older or impaired insured, at the cost of ending the coverage and generating a taxable event with information reporting. The trust-owned process — authority, beneficiary notice, carrier verification of coverage, escrow, and the change of ownership — is at selling a trust-owned policy.
6. Distribute or transfer the policy in kind to a beneficiary, a shareholder, or the insured. This is where the transfer-for-value trap lives, along with IRC § 2035’s three-year rule if the transferee is the insured and the transferor was a trust.

On valuation: cash surrender value is a carrier formula fixed at issue; market value depends on the insured’s current life expectancy, the required premium stream, the death benefit, and a buyer’s cost of capital. Where health has declined those diverge substantially, and only in one direction, since an owner can always surrender instead. A complete file contains both figures. Pine Lake Life Solutions is an educational resource for planners and fiduciaries and does not purchase policies; licensed providers price policies, and a no-cost review through a licensed broker produces an indicative range for the file.

North Dakota Tax Posture, Regulator, and Statute

Transfer taxes. North Dakota’s estate tax provisions are tied to the federal credit for state death taxes, which was phased out federally, with the result that no North Dakota estate tax is currently imposed. There is no separate North Dakota inheritance tax. Confirm the current posture with the Office of State Tax Commissioner.

Income tax. North Dakota imposes a personal income tax, restructured in 2023 to eliminate liability for many filers and hold the top rate to a low single-digit percentage, and it taxes trust income. A federally taxable gain on a settlement therefore carries only a small state layer for a North Dakota resident owner or grantor — one of the lowest such layers in the country. The framework is at North Dakota life settlement taxes; the computation belongs with the client’s CPA.

Federal reporting. A reportable policy sale triggers the IRC § 6050Y regime and generates Forms 1099-LS and 1099-SB. Revenue Rulings 2009-13 and 2009-14 supply the gain framework, and the Tax Cuts and Jobs Act removed the cost-of-insurance basis reduction for transactions after August 25, 2009, generally raising basis. Grantor trust status determines whose return reports a trust-level gain.

Regulator. The North Dakota Insurance Department, headed by an elected Insurance Commissioner, licenses producers and settlement market participants, maintains a licensee lookup, and receives consumer complaints at no cost. See North Dakota Insurance Department consumer help.

Statute. North Dakota’s insurance law is codified at Title 26.1 of the North Dakota Century Code, with viatical and life settlement provisions within that title and implementing rules in the North Dakota Administrative Code. We are not publishing a specific chapter and section number here. Pull the current citation from the Century Code online or confirm with the Department before using it in a memo or an opinion letter. Licensing detail is at North Dakota life settlement licensing.

For any settlement, three items belong in the file: license verification for the broker and the ultimate provider; the broker’s written compensation disclosure, since the broker owes a duty to the policy owner rather than the buyer; and the calendared statutory rescission window running from receipt of proceeds. Where the insured is also the subject of long-term care planning, coordinate with elder law counsel — that side is at the North Dakota elder law guide.

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Frequently Asked Questions

What did Connelly v. United States change for North Dakota buy-sell agreements?

The Supreme Court held in 2024 that life insurance proceeds a corporation receives to fund a redemption of a deceased shareholder’s stock increase the corporation’s value for estate tax purposes, and that the redemption obligation does not offset that value. Entity-redemption structures therefore inflate the decedent’s estate. Cross-purchase structures avoid it but raise transfer-for-value issues when moving existing policies.

Does North Dakota impose an estate tax?

No tax is currently imposed. North Dakota’s estate tax provisions are tied to the federal credit for state death taxes, which was phased out federally, and there is no separate North Dakota inheritance tax. Combined with the $15 million federal basic exclusion for 2026, the transfer tax rationale behind most legacy policies in North Dakota files has ended.

How do North Dakota’s farm entity restrictions affect an insurance restructuring?

They constrain who may hold an interest and what a buy-sell can accomplish. A restructuring from entity redemption to cross-purchase that would be routine elsewhere may run into ownership eligibility limits under North Dakota’s farmland ownership framework in Title 10 of the Century Code. Confirm what the entity structure can legally become before designing the insurance fix.

What should be checked on a company-owned policy before disposing of it?

Three things: whether IRC § 101(j) notice-and-consent requirements were satisfied before issue for contracts issued after August 17, 2006, along with Form 8925 reporting; whether a transfer would trip IRC § 101(a)(2)’s transfer-for-value rules; and who under the bylaws or operating agreement is actually empowered to sign a change of ownership.

Are there alternatives to insurance for an illiquid North Dakota farm estate?

Yes, and they should be evaluated before the disposition decision. Federal law provides special use valuation under IRC § 2032A, installment payment of estate tax attributable to a closely held business interest under IRC § 6166, and the qualified conservation easement exclusion under IRC § 2031(c). Where a family qualifies, the case for continuing an expensive policy weakens considerably.

What is the concrete annual duty of a North Dakota ILIT trustee?

Request a current in-force illustration from the carrier in writing, at both guaranteed and current assumptions, and file it with a short memo. For a guaranteed universal life contract, ask explicitly whether the no-lapse guarantee is intact and to what age. North Dakota’s Uniform Trust Code provisions sit in Title 59 of the Century Code; confirm the applicable prudent investor rules.

Related Reading

• Buy Sell Agreement Policy Unneeded
• Key Person Policy Executive Retired
• Business Sold Coli Policies
• Sell Ilit Trust Owned Policy
• Trustee Duty Underperforming Policy
• North Dakota Insurance Department Consumer Help
• Life Settlement Licensing North Dakota
• Life Settlement Taxes North Dakota
• Elder Law Attorney Life Settlement Guide North Dakota

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Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.