PIERRE – South Dakota’s status as a tax-free place for wealthy people to establish personal and family trust funds hasn’t produced many jobs other than at law firms. But state lawmakers were told Friday that white-collar jobs could result if South Dakota allows more types of captive insurance companies, including captive trusts which currently aren’t recognized in any state.

In a captive arrangement an operator owns the business being insured and the insurance company serving it. The business pays premiums to the insurance company. This arrangement was developed during the 1970s as insurance became costly for high-risk business lines.

Lawyers in the South Dakota State Bar Association joined their counterparts in several other states to form a captive insurance company that would serve them in their law practices. The company is now headquartered in Montana.

Four captive insurance companies currently operate in South Dakota. Legislation that will be presented next week in the state House of Representatives would allow three new types of captive insurance operations.

One is a sponsored captive, where the assets of different businesses are placed into individual cells, with those cells are segregated so losses are separated by cell. Special purpose captives are owned or controlled by a parent company and can only insure the risk of its parent.

The third new type would be trust captives. They would need to have a trust administration in South Dakota, have some assets in South Dakota and have a South Dakota trustee.

Mallori Barnett, a lawyer for the state Division of Insurance said a business owner could create a captive insurance company and place the shares into a trust for the benefit of the person’s children, giving the trust the ownership interest.

This can provide “a substantial tax savings,” she said, with the Division of Insurance reviewing the insurance and the Division of Banking reviewing the trust. She said trusts will be more attracted to South Dakota as a result.

The legislation, HB 1061, was endorsed Friday by the House State Affairs Committee. Its chairman is House Republican leader David Lust of Rapid City, who also chairs state government’s work group on trust administration.

The work group was created several decades ago at the suggestion of then-Gov. Bill Janklow and has been kept in place by every governor since him.

Matt McCaulley, a Sioux Falls lawyer representing several trust companies, told legislators “good, high-paying jobs” will be created. He said Vermont now 588 captive trusts. Beyond the jobs in the insurance companies, he said, it will be a chance to tell South Dakota’s story about low red tape and low taxes.

“This is one of those pieces of legislation that will bring jobs to South Dakota,” McCaulley said.

No one spoke against HB 1061.

McCaulley said the task force has been considering the expansion into captive trusts for years and studied all other states. He said South Dakota would become the most competitive regulatory environment for trusts in the nation and, he predicted, captive trusts would transfer here from off-shore locations, bringing jobs, insurance premiums which are taxed and administrative fees with them.

“I like the economic development aspects of this,” House Democratic leader Bernie Hunhoff of Yankton said. “We need to work together, find jobs in all sectors.”

But Hunhoff also suggested that Republicans opposed to Medicaid expansion because of its potential impact on the federal deficit need to also show the same concern about attracting trusts back to the U.S. because of favorable tax treatment at the federal and state levels.

Lust disagreed. He said the fiscal impact argument is “a red herring” and there shouldn’t be any additional impact because trusts are operating now in either other states or in overseas locations where they aren’t subject to U.S. taxes.

The committee’s vote to recommend passage was 13-0. The full House of Representatives could take up the measure as early as Tuesday afternoon.

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