Alaska had nothing to lose.
Business for private placement life insurance (PPLI), a tool that helps wealthy investors avoid income, gift, and estate taxes, was going to offshore tax havens like Bermuda, so creating an incentive to bring it to the Last Frontier State seemed like a good way to draw in a new source of jobs and revenue.
The state in 1998 slashed its tax on life insurance premiums from 2.7 percent to 0.1 percent for policies with annual premium amounts over $100,000. The tax rate stayed at 2.7 percent on the first $100,000 of premium.
The tax cut was supported by the director of the Alaska Division of Insurance at the time as having unlimited potential to raise revenue for Alaska. (For more, see coverage in Tax Notes Today State.)
The move ended up setting off a quiet competition between some of America’s least populous states to lower taxes and make other changes to attract PPLI that has been a boon for wealthy individuals at the expense of federal revenue, a Tax Notes investigation has found.
Industry professionals say low state premium taxes in combination with favorable trust statutes have helped lure PPLI policies that had previously gone to offshore jurisdictions.
Favorable changes for PPLI are often written by estate attorneys and pushed by lobbyists for trust companies or banks, who argue that the policies will bring business and revenue to states that would have otherwise gone elsewhere. Lawmakers eager to generate tax revenue and create jobs are often easily persuaded by those arguments.
While efforts to attract PPLI seem to have brought some economic benefits to these states, they don’t appear to be significant.
‘Tax Nirvana’
PPLI is a special type of life insurance that is only available for accredited investors, meaning they must have a net worth of more than $1 million, excluding their primary residence, or annual income of over $200,000 (or $300,000 for couples).
The Senate Finance Committee says it is working on legislation to curb its use after an investigation found that millionaires and billionaires are using it to shelter wealth from taxation.
Also called an “insurance wrapper,” a PPLI policy is structured as a private contract between the insurer and the investor and lets the investor “wrap” an investment portfolio within the life insurance, thus allowing the investor to avoid paying taxes on the buildup of income inside the policy. The arrangements can also be structured to allow policyholders to minimize their estate tax liability. PPLI is expected to be used more frequently in estate planning, particularly if stepped-up basis is eliminated at the federal level.
“There are a lot of people who do private placement policies, and of course, the people who approach them are typically looking to avoid income tax,” Jonathan Blattmachr of Pioneer Wealth Partners said, calling the lack of taxation of earnings inside the policies a “kind of tax nirvana.”
PPLI policies can be obtained from domestic insurance carriers or offshore ones. Most domestic PPLI is supplied by carriers admitted in Delaware, South Dakota, and Alaska, according to a 2022 report from Lion Street Financial.
Those states levy low or no taxes on annual life insurance premiums over $100,000. Wyoming is also viewed as a favorable jurisdiction for PPLI by some estate planners. Wyoming cut its premium tax in 2020 for life insurance policies with premiums over $100,000, which in combination with other changes, was intended to lure PPLI policies.
If someone is funding a large PPLI policy with millions of dollars, state premium taxes are a top consideration when considering where to set up a policy, according to industry professionals. One reason to go offshore to set up a policy is to avoid state premium taxes, professionals said.
“Those basis points matter,” said Brandon Avergon of PPLI specialist firm Rampart Consulting Group. “They translate into actual dollars.”
When looking to set up a PPLI policy, some people also ask about privacy and confidentiality, Avergon said, explaining that “those questions really apply more to setting up a company or a trust.”
Typically, the policies are held in trusts. If an out-of-state resident wants to purchase a policy in one of the states with lower premium taxes, the policies might be held by a limited liability company or a trust.
People living outside Alaska, Delaware, South Dakota, and Wyoming can take advantage of the beneficial laws for PPLI in those states.
“All the major corporate trustees around the country have separate entities in all of these good states that will accept out-of-state trust business,” explained estate planning attorney Lawrence Brody of Harrison LLP. “If I’ve got a Missouri client, my go-to state would be South Dakota. I’ll get a hold of one of the South Dakota trust companies, have them act as trustee, and we get situs in that state.”
Beginnings
Sponsors of the 1998 Alaska legislation cited a 1996 survey from the Life Insurance Marketing and Research Association, which estimated that of the 11.6 million life insurance policies sold in the United States, about 11,600 policies had annual premiums over $100,000. Records from Alaska show the state hasn’t had more than 208 of those policies between 2012 and 2022.
In 2015 Alaska lawmakers were persuaded to further reduce their tax rate to lure policies from South Dakota, which had a lower tax rate and other favorable conditions for PPLI (see legislation (S.B. 15) in Tax Notes Today State).
A fiscal note predicted that the tax cut would have a negligible fiscal impact but that it would increase tax revenues because more PPLI policies would come to the state.
When asked whether she thought the legislation would spur job creation, Lori Wing-Heier, director of the Alaska Division of Insurance, told legislators she expected reducing the tax would lead to more hires in the insurance industry. The number of insurance agents and brokers in Alaska declined between 2016 and 2021, according to a report from the National Association of Insurance Commissioners.
Then-state Sen. John Coghill, sponsored S.B. 15 to further reduce the premium tax from 0.1 percent to 0.08 percent on annual premiums of life insurance policies over $100,000.
“This goes all the way back to 1997 when a predecessor of mine introduced the trust administration law . . . which was unique,” Coghill said during an April 2015 meeting.
Coghill was referring to the 1997 Alaska Trust Act, which helped attract trusts to Alaska that were going to offshore jurisdictions. That law and others modeled after it have helped attract wealth to the United States that was previously in overseas tax havens, as was unearthed by the Pandora Papers investigation.
Coghill said that around 2010 the state had $208 million in investment for single or group life insurance as a result of the trust law. But because South Dakota enacted similar laws, the investment declined to $79 million. Coghill acknowledged that concerns about a “race to the bottom” were legitimate but said his bill would increase investment, jobs, and tax revenue in Alaska.
Blattmachr is credited with transforming the trust industry in the United States by helping to write the Alaska Trust Act.
Blattmachr explained in an interview with Tax Notes that he wanted to bring self-settled trusts or those that provide asset protection and were only available in offshore jurisdictions to the United States. He said he took the idea to Alaska because it would be easier to get the law enacted there than in New York, which was where he primarily practiced law at the time.
Blattmachr, who is a director at Peak Trust Co., acknowledged that he contributed to Coghill’s 2016 reelection campaign but said that contributions don’t influence legislators. “I knew John Coghill personally and wanted to help him, and I’ve helped others,” he said.
Peak Trust, originally founded as Alaska Trust Co. in 1997, serves as trustee for PPLI policies and is a custodian for those policies held in LLCs, according to its website.
Blattmachr has also helped convince lawmakers to reduce premium taxes for PPLI.
To get Alaska’s premium tax lowered in 1998, Blattmachr says he met with Marianne Burke, who was director of the state’s Division of Insurance at the time.
Burke “told me that no one in the state paid an annual premium of anywhere near close to $50,000 a year,” Blattmachr said. He suggested setting the threshold at $100,000.
The law’s enactment meant that people who wanted to use life insurance as an income tax avoidance regime could do it in Alaska and avoid the premium tax, Blattmachr explained.
In a 2015 letter to co-chairs of the state’s Senate Finance Committee, Blattmachr urged support for S.B. 15, saying that after the 1998 tax reduction was enacted, “Alaska has received millions of dollars each year on life insurance premiums paid by individuals residing in other states and without incurring any cost to the state and without any loss of revenue on premiums paid by Alaskans.”
Data show that Alaska collected about $357,000 in 2012 from 106 policies that qualified for the lower rate and grew to about $880,000, which was collected in 2022 from 208 policies.
To put that into context, Alaska collected about $3.87 billion in unrestricted general fund revenue in fiscal 2022 (not including the transfer from the Alaska Permanent Fund), according to data that was provided to the National Association of State Budget Officers. The $880,000 collected on those policies represents roughly 0.02 percent as a percentage of total unrestricted general fund revenue collected in fiscal 2022, the association’s Kathryn Vesey White said.
Lucy Dadayan of the Urban Institute pointed out that Alaska’s revenue is volatile because of its reliance on severance taxes and investment income but said that “the $880,000 amount is only a tiny share of Alaska’s total budget.”
Following Alaska
In 2001 South Dakota adopted legislation to attract PPLI.
Estate planning attorney David S. Neufeld of Flaster Greenberg says his prior firm was hired as an outside adviser by Citibank to draft legislation making the state friendlier for PPLI.
Neufeld and his former partner, Grant R. Markuson, worked with Pierce H. McDowell III and Al W. King III, both with Citicorp Trust South Dakota at the time, to get those changes enacted. McDowell and King are now co-CEOs of South Dakota Trust Co.
“We just recognized that — with the increased growth of private placement life insurance and based on some of the desires of our clients — that it might be good to reduce our premium tax,” King told Tax Notes. “Most of the premium taxes in the U.S. average 200 basis points, and so we just thought joining Alaska would be a good thing to do.”
S.B. 225 reduced South Dakota’s premium tax on life insurance premiums of more than $100,000 per year and annuities over $1 million a year. During a February 2001 hearing on the bill, lobbyist Jeremiah Murphy pitched the bill to bring new business to the state.
Murphy explained that there are life insurance policies being created for wealthy families with dynasty trusts with millions of dollars in insurance premiums each year, but those policies were going offshore, and no states besides Alaska were trying to attract the business. He said his client (Citibank) believed that virtually no policies with premiums above that threshold were being written in South Dakota at the time.
Backed by the South Dakota Division of Insurance and the governor’s office, the bill passed easily.
Neufeld said he thinks the changes are responsible for bringing PPLI to South Dakota that would have otherwise gone offshore. “Within a couple of years, we noticed that — at least in our practice — a significant amount of business was shifting onshore at that point, and a great deal of it was going to South Dakota,” Neufeld said.
South Dakota has received attention for its booming trust industry, with over 100 trust companies now chartered in the state. The state even has its own trust task force, which recommends updates to the trust law with the goal of “maintaining South Dakota’s stature as the premier trust jurisdiction in the United States.”
King explained that South Dakota has a special process for passing trust legislation. A proposal is presented to the governor’s Task Force on Trust Administration Review and Reform (South Dakota Trust Co. has representation on the task force), which then brings it to the governor’s office to see if it can become legislation and to find a sponsor, according to King.
South Dakota revised its laws again in 2009 for PPLI.
During a February 2009 hearing, Matthew Tobin of South Dakota Trust Co. urged legislators to support H.B. 1158, which was drafted in coordination with the state Division of Insurance. Tobin explained that his firm had about 30 trusts with PPLI at the time.
King said that South Dakota Trust Co. had a lot more trusts with PPLI now, but he didn’t provide the figures by press time. The firm’s website says it has trust assets totaling $140 billion.
People across the country were interested in setting up their PPLI policies in South Dakota because of the state’s combination of good trust laws and low premium taxes, according to Tobin. He added, however, that some of that business was going to other states like Alaska and Delaware because the laws needed to be updated.
Then-Rep. Joni Cutler, who sponsored the bill, explained in February 2009 that South Dakota wanted to remain on the forefront of the estate planning and trusts industry. The bill passed the Legislature without objection and was signed by the governor in March 2009.
While the trust industry in South Dakota has undoubtedly brought jobs and business to South Dakota, the economic impact of PPLI is less clear.
Dawn Dovre, a deputy secretary at the South Dakota Department of Labor and Regulation, told Tax Notes in an email that the state doesn’t collect information about the number of PPLI policies or the amount of tax revenue they generate. And the state has never studied the economic impact of S.B. 225, according to Dovre.
King acknowledged that South Dakota’s premium tax on PPLI policies is low but added that while “it’s not a huge tax,” it is one that wouldn’t have otherwise been collected without the legislation.
“The good thing is it’s not paid by the residents. . . . It’s paid by nonresidents,” King said.
King said that South Dakota Trust Co. has over 100 employees and two buildings in the state. While policyholders don’t have to use an insurance agent or investment manager in South Dakota, the accounting, legal, and insurance industries in the state have benefited from PPLI, he added.
Other States
To attract trust-owned PPLI policies, the Wyoming Legislature in 2020 reduced the tax rate from 0.75 percent to 0.075 percent on the portion of a life insurance policy’s annual premium above $100,000, with the hopes of generating more revenue and creating more financial sector jobs.
Premiums above that threshold were also exempted from retaliatory provisions that requires the state to collect the tax based on the insurer’s domestic state’s tax rate or Wyoming’s tax rate, whichever is greater, according to a report from the Wyoming Insurance Department.
The Wyoming Legislature cut the premium tax rate in 2020 under S.F. 71 to attract trust-owned PPLI policies, with the hope of generating more revenue and creating more financial sector jobs.
“We were persuaded by some financial operators up in Jackson Hole this would be a good idea,” Wyoming state Sen. Cale Case (R), who sponsored S.F. 71, told Tax Notes.
The tax cut was expected to increase revenues by attracting new life insurance policies. The Wyoming Department of Insurance estimated that the tax rate would increase revenues in fiscal 2022 by about $76,000 from 21 new life insurance policies. However, a fiscal note says S.F. 71 could decrease revenues by $101,000 because of the tax reduction.
In 2021 15 new life insurance policies with annual premiums of more than $100,000 were reported in Wyoming. Those policies generated about $30,000 in premium tax, according to a Wyoming Department of Insurance report, which said the state would have collected about $160,000 if S.F. 17 wasn’t enacted.
Wyoming Insurance Commissioner Jeff Rude said the department was neutral on the bill, which was supported by attorneys looking to grow the market for PPLI in the state. If there are any new jobs created because of it, Rude thinks it would be a few at law or accounting firms. “I had no expectation that there would be many new jobs from something like this,” he said.
Rude said there were 25 PPLI policies written in Wyoming in 2022.
“I think it’ll be some time before we can say, ‘Hey, we’re actively competing against South Dakota,’” Rude said, noting how the other state had a fully developed product that was marketed for a long time.
Rep. Mike Yin (D), the sole legislator to vote against the bill in the Wyoming House of Representatives, didn’t recall his exact reason for his vote but suspects it was because he wasn’t “convinced that premiums above $100,000 should be taxed differently and that it could likely advantage specific classes over others.”
Case said the legislation is part of a larger effort to make Wyoming more business friendly. But observing that shell companies are being set up in Wyoming through trusts that own LLCs — also known as a “cowboy cocktail” — he said he sometimes wonders if policies designed to bring in business are encouraging shady activities.
Gary Kalman of Transparency International said that while life insurance isn’t usually used for money laundering, PPLI could be used for that purpose because of the opacity of the structure.
Under the Corporate Transparency Act, LLCs, corporations, and other entities are now required to disclose information about their beneficial owners to Treasury’s Financial Crimes Enforcement Network. The law was adopted to curb the use of shell companies in tax fraud, money laundering, and other corrupt activities. That information will not be made public, but some states are looking to create public databases of beneficial ownership (see coverage in Tax Notes Today State).
Meanwhile, Delaware has also tried to attract PPLI. In 2016 the state enacted changes under H.B. 237 that applied a 2 percent premium tax on the first $100,000 in premiums collected from trust-owned PPLI policies and eliminated the tax altogether on premiums above $100,000.
There hasn’t been a significant increase in the use of PPLI in Delaware because the 2016 law didn’t apply to policies that were owned by an LLC in a trust structure, according to Todd A. Flubacher of Morris, Nichols, Arsht & Tunnell LLP. But the Trust Act of 2023 (H.B. 132), brought by the Estates and Trust Law Section of the Delaware State Bar Association, was recently enacted to address that issue.
Flubacher says the effort to cut the premium tax in 2016 was championed by William Denney, an insurance professional who recently died of cancer, who had explained to lawmakers that because of the higher tax rate, hardly any tax revenue was being collected from those insurance premiums anyway.
Economic Impact
Analysts are skeptical that cutting premium taxes for PPLI would have a significant economic impact on the states where they occur.
Those states are attracting a lot more money on paper, but little of that ends up staying there, according to Kalman.
“As an economic development scheme, it is absurd. . . . You’re helping a few lawyers and a couple of accountants, but that’s about it,” Kalman said.
It’s difficult to pinpoint whether jobs have been created by changes enacted to lure PPLI policies.
Data from the Department of Labor and Statistics show that none of the states had the highest employment for business and financial operations jobs. When it comes to states with the most licensed attorneys, the PPLI-friendly ones are nowhere near the top for that either, a 2022 American Bar Association survey shows. And few life insurers are domiciled in those states, according to data from the American Council of Life Insurers.
Lowering premium taxes for PPLI is unlikely to generate much new economic activity for the states, according to Martin F. Grace of Temple University’s Fox School of Business and Management. “I just have a hard time thinking that this is a big deal,” said Grace, who researches the taxation of life insurance. “What it does do is it makes the product a little bit cheaper than it would be otherwise.”
Jeremy Horpedahl of the University of Central Arkansas agreed.
Observing that some of the fiscal impact statements for this legislation predicted that the state revenue impact would be negligible or hard to measure, Horpedahl said in an email that he suspects “the economic impact in total will be small, though for the firms writing the policies it probably is a big deal.”
The tax cuts are potentially problematic because the number of new policies that states will get is so uncertain, according to Horpedahl.
“They will likely be reducing taxes on some policies that would have been written in the state anyway, so it’s very hard to say what the net effect will be, but it’s entirely possible it could be negative,” Horpedahl said.
State policies that subsidize the cost of PPLI come with trade-offs.
In November 2023 testimony before the Senate Finance Committee, Chye-Ching Huang of New York University’s Tax Law Center said that “tax subsidies for income from wealth are a poor investment.” She added that those subsidies “increase deficits, widen inequality, and spur complex tax avoidance and evasion that locks up capital and talent that could be used for more productive work and innovations.”
The amount of money held in PPLI is considerable. At the end of 2022 seven of the largest PPLI providers had 3,061 policies in force, which will allow policyholders to pass on about $40 billion in wealth to their heirs, according to a February 21 report from the Senate Finance Committee. However, the actual size of the PPLI market is expected to be higher, as the study doesn’t account for the offshore PPLI market.
Huang explained that tax planners “have found ways to exploit loopholes and deliberate preferences in the code to take that income from wealth entirely out of the tax system by running it through various vehicles recognized by the tax code.” She listed PPLI among the tax shelters used for that purpose.
But while some blame those favorable policies on lawyers and wealth advisers, Blattmachr pointed out that lawmakers are the ones who are responsible for making the law.
“Once in a deposition, I was accused by the other side of personally being responsible for a big part of the deficit because I was perceived to be such an effective tax lawyer,” Blattmachr said. “Well, that was very nice to hear — I regarded it as very flattering. But you know, that’s what lawyers are supposed to do — get the best thing they can for their clients.”