Life Settlements for South Dakota Corporate Trust Officers: A 2026 Practice Guide

SDCL Chapter 55-1B: The Directed Trust Statute That Started It

South Dakota is not a Uniform Trust Code state. Its trust law is its own, codified at Title 55 of the South Dakota Codified Laws, and it is maintained deliberately: a Governor’s task force on trust administration reviews the code and proposes legislation on an ongoing basis, which is why South Dakota’s statutes tend to be ahead of the uniform acts rather than behind them.

The provisions that structure an insurance file:

• SDCL chapter 55-1B — trust advisors, trust protectors, and the excluded fiduciary concept, enacted in 1997. Where an instrument allocates a power to an advisor or protector, the trustee excluded from that power has materially narrower exposure with respect to it. Much of the country’s directed-trust legislation descends from this chapter.
• SDCL § 43-5-8 — the rule against perpetuities, abolished for trusts in 1983. South Dakota was the first state to do it, and perpetual duration is the core of the situs case.
• SDCL chapter 55-5 — the fiduciary investment standard. Portfolio approach, duty to diversify subject to a special-circumstances exception, duty to review trust property after accepting the trusteeship, and duties of care in delegation.
• SDCL § 21-22-28 — the sealing of trust proceedings, which permits a degree of confidentiality in court filings unavailable in most jurisdictions.

Confirm current section numbering before it goes into a memo; South Dakota amends Title 55 nearly every legislative session, which is a feature of the jurisdiction rather than a defect, but it means a citation learned five years ago may have moved.

South Dakota trust companies are chartered and supervised by the state Division of Banking, which is a separate regulator from the insurance regulator that governs a settlement transaction. Trust officers should know both exist and which one answers which question.

Excluded Fiduciary Is Not a Blank Check

Chapter 55-1B works. It is also read too broadly by trust officers who have not sat with the instrument, and the gap between what the statute protects and what officers assume it protects is where the exposure lives.

Four questions must be answered from the governing instrument in every directed insurance file:

1. Does the advisor’s or protector’s granted authority actually reach this decision? A power over “investment decisions” may or may not encompass surrendering or selling a life insurance contract. Instruments drafted before the secondary market matured routinely do not address it, and the ambiguity is not resolved by the label on the file or by the department’s practice.
2. What is the excluded trustee’s residual conduct standard? Read the exculpation language alongside chapter 55-1B and know the answer before a direction arrives, not after a loss.
3. What did the trustee receive, and what did it forward? Carrier statements, premium notices, rate-change correspondence, and lapse warnings arrive at the trustee, not at the advisor. Forwarding them in writing with a retained transmittal is the cheapest risk control available in this business. Holding a notice showing an imminent lapse while asserting excluded status is a posture that does not improve with time.
4. Is the advisor actually functioning? A named advisor who has not responded in three years is an empty chair. A trustee treating an empty chair as a shield is running a risk no statute addresses. The correct response is to say so in writing to the beneficiaries and to the person with power to appoint a successor advisor.

The instructive failure is administrative rather than analytical. In Rafert v. Meyer, 290 Neb. 219 (2015), a trustee of an insurance trust did not provide the carrier with a current address; premium notices went undelivered and substantial policies lapsed. The Nebraska Supreme Court held a broad exculpatory clause did not shield the trustee from liability for failing to perform basic administrative duties. It is not South Dakota authority and does not bind a South Dakota court. It is nonetheless the most useful case in the field, because trust departments do not lose these matters on judgment. They lose them on mail.

The controls follow directly: confirm annually and in writing that each carrier holds the trustee’s current address of record and servicing contact; log receipt of premium notices; reconcile premiums due against premiums paid annually; and verify ownership and beneficiary designation with the carrier rather than from the trust file, particularly after any trustee or advisor succession.

Perpetual Trusts and a Forty-Year COI Exposure

Perpetual duration is South Dakota’s competitive advantage and, for insurance specifically, its longest-tail risk.

A universal life policy deducts a monthly cost-of-insurance charge from account value, and that charge is a function of the insured’s attained age. It rises gradually through the sixties and seventies, steeply after 80, and dramatically after 90. A contract funded in 2005 on a 58-year-old, illustrated at assumptions that never materialized, may have been quietly consuming its own account value for two decades — with the first visible symptom being a lapse notice. The mechanics are set out at universal life cost-of-insurance increases.

Beginning around 2015, several carriers went further and raised non-guaranteed cost-of-insurance rates on entire blocks of in-force universal life. The increases were substantial on some blocks and produced a wave of class litigation; the largest resolution to date is the Feller v. Transamerica Life Insurance Co. settlement approved in the Central District of California in 2018 at approximately $195 million.

What perpetual duration does to the analysis:

• Project long. Ask the carrier to solve to age 100 and to age 105, not to 90. On survivorship contracts — common in dynasty structures — ask specifically for the projection after the first death, which is when the charge structure changes and when a great many survivorship policies quietly become unsustainable.
• Weight the guaranteed column. Across forty years, current assumptions are aspirational. The guaranteed lapse age is what the carrier is contractually bound to, and on many contracts it is dramatically earlier than the current-assumption figure.
• Treat a no-lapse guarantee as an asset in its own right. Where a contract carries one, a single late or short premium can void it, generally irreversibly, converting a durable contract into a fragile one with no other visible change.
• Plan for succession. Over a perpetual horizon there will be trustee successions, advisor successions, department reorganizations, and carrier mergers. Each is a point at which the address of record, the illustration cycle, and the funding arrangement quietly break. The handoff checklist matters more here than in a trust with a defined termination date.

Item	South Dakota posture (confirm before relying on it)
Trust code	Not a UTC state — SDCL Title 55, amended most legislative sessions
Directed trusts	SDCL ch. 55-1B (1997) — trust advisors, protectors, excluded fiduciary
Perpetuities	RAP abolished for trusts in 1983, SDCL § 43-5-8 — first state to do so
Fiduciary investment standard	SDCL ch. 55-5
Confidentiality	Sealing of trust proceedings available, SDCL § 21-22-28
Trust company regulator	South Dakota Division of Banking (separate from the insurance regulator)
Insurance regulator	South Dakota Division of Insurance, Dept. of Labor and Regulation, Pierre
Insurance code	SDCL Title 58; confirm current settlement chapter with the Division
State income tax	None — including no tax on trust income
State estate tax	None
State inheritance tax	None — repealed effective 2001
Medicaid individual resource limit	$2,000 (ABD / institutional) as of 2026 — confirm with DSS
Skilled nursing cost	Roughly $7,500–$9,000/month semi-private — among the lowest in the U.S.

The In-Force Ledger and the Annual Review

Run a ledger across the department, not a file per trust. One schedule, refreshed annually, with one row per contract. Minimum columns:

• Carrier, product name, policy number, and chassis — whole life, universal life, guaranteed universal life, indexed universal, variable universal, survivorship, convertible term.
• Insured’s date of birth; for survivorship contracts, both insureds and whether the first death has occurred.
• Face amount, current death benefit option, and any outstanding policy loan with its accruing interest.
• Account value, cash surrender value, and remaining surrender charge — three different numbers that must never be used interchangeably.
• Annual premium, mode, next due date, and funding source.
• No-lapse guarantee: present or absent, and if present, intact or forfeited.
• Projected lapse age at current assumptions and at guaranteed assumptions.
• Date of the most recent in-force illustration.
• Change in projected lapse age from the prior year.
• Advisor or protector of record, the scope of that authority, and the date of last contact.

The last two columns do the work. The change in projected lapse age is the diagnostic that surfaces a COI increase, a fallen credited rate, a missed premium, or an accruing loan — any of which requires a documented response. The advisor contact date is what surfaces the empty chair.

The annual cycle is simple: order illustrations in the first quarter at both assumption sets with a premium solve to a target age; confirm addresses of record in writing; update the ledger; flag any contract whose projected lapse age moved more than three years earlier, whose account value fell against an unchanged premium, or whose guarantee is no longer intact; write one memo per flagged contract; communicate with beneficiaries where a change of course is contemplated; and file the year’s work with the illustrations attached and decisions dated — including the decision to take no action.

Roughly ninety minutes per trust per year. Against the exposure on a seven- or eight-figure contract that lapses because nobody looked, the arithmetic is not close.

Sell, Surrender, Reduce, or Keep

When a South Dakota trust concludes it will not continue funding a contract at the required premium, four options exist and a defensible file considers all four.

1. Continue funding. Ask the carrier to solve for the premium that carries the contract to the target age at guaranteed assumptions, not merely current. That is the number the trust is actually exposed to in the worst case, and it is frequently much larger than the number in the original illustration.
2. Reduce the death benefit, or move to a reduced-paid-up or paid-up posture. Consistently the most overlooked option. It preserves part of the benefit and ends the premium obligation, which in a perpetual trust with no other liquid asset is often the difference between a durable structure and a failed one.
3. Surrender for cash surrender value. Fast and simple, and the worst outcome where the insured’s health has declined since issue, because the carrier’s formula does not price mortality.
4. Dispose of the contract in the regulated secondary market. Available only where the policy and the insured meet market criteria — generally an insured over about 70, face above roughly $100,000, and a universal or convertible chassis. Where available, the process produces competing offers that themselves evidence fair market value, which is useful to a fiduciary independent of whether the trust ultimately sells. The mechanics for a trust-owned contract are at selling an ILIT-owned policy.

Value in that market is driven by the insured’s actual life expectancy, and the underwriting behind it is a discipline of its own — see life expectancy underwriting. Where two life expectancy reports are commissioned they frequently disagree, sometimes by years. Keep both. Retaining only the favorable one is precisely the appearance a fiduciary should avoid, and a beneficiary’s counsel will learn that a second report existed.

Three federal provisions belong in a memo to counsel before any transaction moves: IRC § 2035, which pulls a policy back into the gross estate on a transfer by the insured within three years of death; IRC § 101(a)(2), the transfer-for-value rule with its exceptions including transfers to the insured and transfers between grantor trusts under Rev. Rul. 2007-13; and IRC § 6050Y reporting, which generates Forms 1099-LS and 1099-SB on a reportable policy sale.

South Dakota’s own tax posture removes one variable entirely: no individual income tax, no estate tax, and no inheritance tax — the inheritance tax having been repealed effective in 2001. There is no state tax on trust income, which is a substantial part of why the trust is sited here in the first place. That makes any analysis purely federal. See South Dakota life settlement tax treatment and the South Dakota CPA guide.

Trust Protector Direction and the Written Record

In a directed South Dakota trust the trustee is often not the decision-maker, and the record has to reflect that accurately — neither claiming authority the trustee does not have nor disclaiming a role it actually played.

What a clean directed-file record looks like when a policy decision is made:

• The instrument excerpt establishing the advisor’s or protector’s authority, with the specific language that covers insurance dispositions.
• The information package the trustee transmitted — current in-force illustration at both assumption sets, cash surrender value net of surrender charges, no-lapse guarantee status, premium history, and any market indication obtained — with the date of transmittal.
• The written direction from the advisor or protector, signed and dated, stating the action directed.
• The trustee’s implementation record: what it did, when, and confirmation from the carrier or counterparty.
• Beneficiary communications, including any advance notice given and any response received.

That record answers the two questions that arise later: did the person with the power make the decision, and did the trustee give that person what they needed to make it? A file containing a direction but no evidence of what information preceded it is a weaker file than one containing both.

On beneficiary involvement: beneficiaries hold no veto — the trust owns the contract — but a remainder beneficiary who first learns of a disposition from an accounting will contest it for years. Notify in advance where practical, document the response, and proceed. Where the instrument or the circumstances call for actual consent rather than notice, the mechanics matter and are discussed at consent in an irrevocable trust policy sale. Where minor or unborn beneficiaries are involved, discuss representation and any available nonjudicial settlement mechanism with counsel before the transaction rather than after.

One further point specific to South Dakota: the availability of sealed trust proceedings under SDCL § 21-22-28 means a dispute here may be less public than it would be elsewhere. That is not a reason to be less careful. It is a reason not to assume that the absence of visible litigation in the jurisdiction means these disputes do not happen.

The South Dakota Division of Insurance and Title 58

The regulator is the South Dakota Division of Insurance, within the Department of Labor and Regulation, based in Pierre — a different agency from the Division of Banking that charters and supervises the trust company. It licenses producers, brokers, and settlement providers doing business in the state, and its records are what a trustee checks before permitting any intermediary near a trust-owned contract. Its consumer and licensing functions are summarized at South Dakota Division of Insurance consumer help.

South Dakota’s insurance law is codified at Title 58 of the South Dakota Codified Laws, with rules in the Administrative Rules of South Dakota. Viatical and life settlement activity is regulated within that title. We are not publishing a chapter or section number. The provisions have been amended over time, and a fiduciary memo citing a superseded chapter is worse than one citing none. Pull the current chapter from the South Dakota Legislature’s codified laws portal, or call the Division and ask which chapter and rule govern the transaction in question. Licensing detail is collected at South Dakota life settlement licensing.

Four verification steps for the department’s written procedure: confirm the South Dakota license of both the intermediary and the ultimate purchaser against Division records; obtain the compensation disclosure in writing, since a settlement broker generally owes a duty to the policy owner rather than the buyer; calendar the statutory rescission window running after closing, confirmed against South Dakota’s current statute; and confirm the contract’s provenance and insurable interest at inception so the trust does not inherit a stranger-originated policy problem.

Where a current beneficiary may need long-term care, two South Dakota figures belong in the distribution memo: the individual countable resource limit for aged, blind, and disabled and institutional Medicaid has been $2,000 as of 2026, and life insurance is excluded only where aggregate face value across all policies on the insured is at or below $1,500, above which the entire cash surrender value counts. South Dakota semi-private skilled nursing has run roughly $7,500 to $9,000 per month in recent surveys — among the lowest in the country, which means a given liquid sum buys materially more time here than in a coastal market. A trust-owned policy is generally not the beneficiary’s countable resource; a personally owned one generally is, and that distinction should never be blurred. Confirm standards at South Dakota Medicaid asset and income limits, and route special needs trust questions to specialist counsel.

And one absolute: nobody in the department accepts compensation, referral fees, gifts, or anything of value from an intermediary in connection with a trust-owned transaction. It is disqualifying, it is discoverable, and it converts a defensible decision into an indefensible one whatever the outcome.

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Frequently Asked Questions

How much does SDCL chapter 55-1B actually protect an excluded trustee?

Less than officers assume until they read the instrument. Four questions decide it: whether the advisor’s granted authority reaches an insurance disposition; what residual conduct standard applies to the trustee; what the trustee received from the carrier and whether it forwarded it in writing; and whether a named advisor is actually functioning. Holding a lapse notice while asserting excluded status is not defensible.

Why does perpetual duration change the insurance analysis?

Because the internal cost-of-insurance charge rises with the insured’s attained age — steeply after 80 and dramatically after 90 — and a perpetual trust may carry the contract across that entire range. Project to age 100 and 105 rather than 90, weight the guaranteed column over the current one, and on survivorship contracts ask specifically for the projection after the first death.

What is the most diagnostic column on an in-force ledger?

The change in projected lapse age from the prior year. It surfaces a cost-of-insurance increase, a fallen credited rate, a missed premium, or an accruing policy loan — any of which requires a documented response. Running a close second is the date of last contact with the named advisor, which is what surfaces an empty chair before it costs the trust a policy.

What should a directed-file record contain when a policy is sold?

The instrument excerpt establishing the advisor’s authority over insurance dispositions; the information package the trustee transmitted and its date; the signed written direction; the trustee’s implementation record with carrier confirmation; and any beneficiary communications. A file containing a direction but no evidence of what information preceded it is materially weaker than one containing both.

Does South Dakota tax the proceeds of a trust-owned policy disposition?

No. South Dakota imposes no individual income tax, including no tax on trust income, no estate tax, and no inheritance tax — the last having been repealed effective in 2001. That removes the state variable entirely and makes the analysis purely federal: IRC § 101 and its exclusions, § 2035, the transfer-for-value rules, and § 6050Y reporting.

Which South Dakota statute governs life settlement transactions?

Insurance law is codified at Title 58 of the South Dakota Codified Laws, with viatical and life settlement activity regulated within it by the Division of Insurance in Pierre — a different agency from the Division of Banking that supervises the trust company. Confirm the current chapter with the Division rather than citing from memory; the provisions have been amended over time.

Related Reading

• Sell Ilit Trust Owned Policy
• Irrevocable Trust Sell Policy Consent
• Universal Life Cost Of Insurance Increase
• What Is Life Expectancy Underwriting
• South Dakota Insurance Department Consumer Help
• Life Settlement Licensing South Dakota
• Life Settlement Taxes South Dakota
• South Dakota Medicaid Asset Income Limits
• Cpa Life Settlement Guide South 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.