South Dakota Supreme Court Upholds Life Settlement Investor’s Right to Retain $10 Million Death Benefit

Viva Capital Trust v. Garrett 

On July 1, the South Dakota Supreme Court issued a unanimous decision affirming summary judgment in favor of a life settlement investor, holding that the investor was entitled to retain the full $10 million death benefit under a life insurance policy that the insured’s estate had sought to void as an alleged stranger-originated life insurance (STOLI) arrangement. 

The decision is a significant positive development for investors in the life settlement industry, as it reinforces the enforceability of premium-financed policies where statutory insurable interest requirements are met at inception and confirms that downstream purchasers may rely on the principle of free alienability of validly issued policies.  

In 2006, Frank Garrett, Jr., a 78-year-old California retiree with a net worth of approximately $20-25 million (consisting primarily of real estate holdings), obtained a $10 million life insurance policy from MassMutual through a premium financing arrangement. The policy was held by an irrevocable trust established by Garrett and governed by South Dakota law, with a South Dakota commercial bank serving as trustee and Garrett’s wife, Jean, named as the trust’s beneficiary. The premiums were financed through a nonrecourse loan from a premium finance lender, United National Funding, LLC, collateralized by the policy itself, with a scheduled maturity of seven years. Two independent insurance agents testified during discovery that Garrett’s purpose in acquiring the policy was to facilitate estate planning — specifically, to provide liquidity for estate taxes and financial security for his wife — and that the policy was not acquired with any prearranged intent to sell. 

After the initial two-year nonrecourse financing period expired, Garrett explored several options, including refinancing and selling the policy on the secondary market, before ultimately surrendering it to the lender’s successor, New Stream, in 2009, as satisfaction of the outstanding loan obligations. The policy subsequently changed hands through additional secondary market transactions until Viva Capital Trust acquired it in December 2014. Viva paid over $4.4 million in additional premiums to keep the policy in force. After Garrett died in January 2019, MassMutual paid the $10 million death benefit to Viva’s securities intermediary.  

In 2022, Garrett’s son, as special administrator of the estate, filed counterclaims alleging that the policy was procured through a STOLI scheme that violated South Dakota’s insurable interest statute, SDCL 58-10-3, and sought disgorgement of the death benefit under SDCL 58-10-5. The estate also challenged the validity of the underlying trust, alleging fraud, undue influence, and lack of capacity. The circuit court granted summary judgment to Viva on all claims, and the South Dakota Supreme Court affirmed in a unanimous opinion authored by Justice Patricia Devaney.  

The court’s analysis proceeded on two principal grounds. First, the court held that the estate’s claims challenging the validity of the irrevocable trust were time-barred under SDCL 55-4-57(a)(1), South Dakota’s statute of repose, which precludes judicial proceedings contesting whether an irrevocable trust was validly created if commenced later than one year after the settlor’s death. Because Garrett died in January 2019 and the estate did not file its counterclaims until June 2022, the challenge was untimely by more than two years. The court construed this provision expansively, holding that it applies to any claims that would negate the valid creation of trusts, encompassing allegations of fraud in execution, undue influence, lack of capacity, and even assertions that the trust lacked a lawful purpose. The court rejected the estate’s attempt to characterize its claims as falling outside the statute’s reach merely because the ultimate remedy sought was recovery of insurance proceeds rather than trust property.  

Second, turning to the insurable interest question, the court applied the plain and unambiguous text of SDCL 58-10-3, which permits any individual to procure insurance on his own life for the benefit of any person, and prohibits procurement on the life of another only where the benefits are not payable to a person with an insurable interest. The court held that regardless of how the term “procure” is defined — whether narrowly as the estate urged or more broadly as Viva argued — the statute is satisfied so long as the policy benefits were payable to a person having an insurable interest in the insured’s life at the time the contract was made. Because the death benefits were payable to the trust as policy beneficiary, and ultimately to the insured’s wife, Jean, as the trust’s beneficiary, and because both the trustee and Jean held statutory insurable interests under SDCL 58-10-4(1) and (6), the insurable interest requirement was met.  

Although the court acknowledged that many features of the transaction “align with a typical STOLI scheme” — including nonrecourse premium financing, the formation of an irrevocable trust with a lender-selected trustee, a collateral assignment, and the eventual surrender of the policy to the lender — the court identified several undisputed facts distinguishing this case from situations where courts have voided policies as unlawful wagers. These included Garrett’s substantial personal wealth and legitimate estate planning motivations, the absence of any upfront payment or financial inducement to the insured, the seven-year loan term (as opposed to a maturity timed merely to the two-year contestability period), the insurer’s documented awareness of the premium financing arrangement, and the fact that for over three years the policy proceeds would have been payable to the trust for Jean’s benefit.  

The court further cited SDCL 58-10-6.1, which expressly provides that no transfer of a validly issued policy shall be invalid by reason of a lack of insurable interest of the transferee, reinforcing the well-established principle from Grigsby v. Russell, 222 U.S. 149 (1911), that a life insurance policy has the ordinary characteristics of freely alienable property.  

Notably, the court observed that South Dakota has not enacted anti-STOLI legislation, unlike approximately 30 other states that have done so, and stated that where courts “cannot devise a bright-line rule,” the matter “is best addressed by the Legislature.” This expression of judicial deference signals that South Dakota courts are unlikely to expand common-law doctrines to invalidate policies that comply with existing statutory requirements, absent legislative action.  

The Garrett decision is a favorable ruling for the life settlements industry. It confirms that premium-financed policies are not inherently suspect and will not be voided in South Dakota, where the named beneficiary holds a valid insurable interest at inception. It also establishes that downstream life settlement purchasers may rely on the statutory principle of free transferability without concern that a policy’s secondary market history will be used to retroactively invalidate it. Moreover, for policies held in South Dakota trusts, the one-year statute of repose creates a short, definitive deadline beyond which estates cannot mount challenges to trust validity, providing meaningful finality protections for investors.  

Finally, the court’s textualist approach to the insurable interest statute is consistent with the methodology employed by the Georgia Supreme Court earlier this year in the Leone case (Wilmington Tr. Co. v. Sun Life Assur. Co. of Canada, 323 Ga. 657 (2026)), suggesting an emerging judicial consensus that plain statutory compliance governs the validity inquiry.