In 1983, South Dakota became the first boutique dynasty trust jurisdiction without state income taxes. The decades that followed saw the creation and adoption of innovative modern trust laws that solidified South Dakota’s status as one of the top trust jurisdictions.
Each new statute introduced and enacted in South Dakota brought about significant changes to the trust, asset protection, privacy, and tax laws of the state, culminating in an unparalleled landscape for families, both domestic and international, to implement customized multi-generational planning with a flexibility and control not seen in the United States Some of the key South Dakota laws are as follows:
Best Rule Against Perpetuities State (Pre-1986 – the modern generation-skipping tax):
South Dakota offers unlimited duration for Dynasty Trusts. The South Dakota statute codified the Murphy case allowing for unlimited duration trusts which the IRS acquiesced. Dynasty Trusts in term states (i.e., 150, 300, 360, 1000, etc.) as well as other non-Murphy case states, all risk possible future tax, statutory, and/or constitutional issues with their Dynasty Trust RAP provisions. A South Dakota Dynasty Trust can endure perpetually and avoid additional federal and state death taxes as well as state income taxes on the trust assets with added asset protection at each generation.
One of the Best Directed and Delegated Trust Statutes:
South Dakota has one of the first and highest rated directed trust statutes in the country. A directed trust allows individuals, who establish a South Dakota trust with an administrative trustee, such as SDTC, to appoint an advisor or committee, who in turn directs the administrative trustee (i.e., SDTC) as to investments and/or distributions of the trust. A directed trust provides a family and their advisors with maximum flexibility and control regarding the trust’s asset allocation, diversification, non-diversification, investment management, and distributions. Additionally, the directed trust provides a structure that involves family members and their advisors, and minimizes trustee fees.
First Domestic Trust Protector Statute:
South Dakota has the first trust protector statute in the United States enacted in 1997. Trust protectors are being utilized more and more with trusts to supplement the investment and distribution committees of many directed trusts. Some advisors draft trust protector functions into trusts domiciled in states without a trust protector statute or have statutes that only reference a trust protector. Not surprisingly, this is not as strong as drafting trust protector functions into a trust domiciled in a state, such as South Dakota, with a trust protector provision by statute. Some of the key South Dakota trust protector powers include:
- Modify or amend the trust instrument to achieve favorable tax status or respond to changes in the Internal Revenue Code, state law, or the rulings and regulations there under;
- Increase or decrease the interest of any beneficiaries to the trust;
- Add or remove a beneficiary;
- Modify the terms of any power of appointment granted by the trust. However, a modification or amendment may not grant a beneficial interest to any individual or class of individuals not specifically provided for under the trust instrument;
- Remove and appoint a trustee, trust advisor, investment committee member, or distribution committee member;
- Terminate the trust;
- Veto or direct trust investment and distribution decisions;
- Change situs or governing law of the trust, or both;
- Appoint a successor trust protector;
- Interpret terms of the trust instrument at the request of the trustee;
- Advise the trustee on matters concerning a beneficiary; and
- Amend or modify the trust instrument to take advantage of laws governing restraints on alienation, distribution of trust property, or the administration of the trust.
Unregulated Special Purpose Entities (SPE) as Trust Protector, Investment and/or Distribution Committees (Unique Statute):
South Dakota was the first state and one of only two states to enact an SPE statute. SPEs are typically a South Dakota LLC or corporation that houses the trust protector, the investment and/or distribution committees or advisors. Consequently, the people serving in these roles are agents or employees of the South Dakota LLC versus serving individually as residents of their home state. This further ties the SPE members and employees to South Dakota situs for asset protection/wealth preservation and income taxation purposes. Additionally, D&O and E&O insurance may be available. Although they register with the South Dakota Division of Banking, SPEs are not Private Trust Companies nor are they regulated but they must work with a qualified South Dakota trust company so that the SPE can direct the trustee as to investment, distribution, and/or trust protector decisions.
South Dakota – The Land of No Taxation and Balanced Budgets:
- No personal income or capital gains taxes
–Individuals and trusts
- No gift tax
- No generation-skipping transfer tax
- No corporate income tax
- No business inventory tax
- No personal property tax (no intangibles tax)
- One of the lowest state premium taxes (8 basis points versus National Average 200 basis points
Excellent, Timely and Inexpensive Trust Reformation/Modification and Top-Rated Decanting Statutes and Processes:
South Dakota’s trust decanting, modification, and reformation statutes are some of the best in the U.S., and the South Dakota reformation/modification process is both very cost effective ($2,500-$3,000) and timely (two to fourteen days) as well as extremely private (i.e., automatic total seal in perpetuity statute). These are useful tools for the change of trust situs to South Dakota to gain the advantages of South Dakota’s laws for trust, asset protection, privacy, and state income tax purposes.
Pure No Income Tax State:
South Dakota does not have an income tax, which allows a trust to grow free of state income taxation.
Best Privacy Statutes in the U.S.:
South Dakota is the only state in the U.S. providing automatic total seal in perpetuity for all court matters involving trusts. This may involve litigation, court approved reformations/modification or decants.
Special Spousal Property Trusts (i.e. Community Property Trusts)- Great Income Tax Planning Opportunity:
South Dakota is one of the few states in the United States to have a statute that allows both residents and non-residents to establish a unique community property trust. Assets held by such trust will be designated as community property allowing individuals to achieve a 100% stepped up cost basis of the assets held in the trust at the death of the first spouse as opposed to a 50% stepped up cost basis (on jointly owned assets) provided for in common law states.
Top-Rated, Unique and Comprehensive Beneficiary Quiet/Notice Statute:
Many families do not want one, more or all of the trust beneficiaries to know of the existence of a trust or the trust assets for various reasons. South Dakota allows for beneficiary waiver of notice, but also provides that the grantor, trust advisor, or trust protector, by the terms of the governing instrument, may expand, restrict, eliminate, or otherwise modify the rights of beneficiaries to information relating to a trust. Consequently, the South Dakota statute is unique in that it allows the trust to also be kept quiet from the beneficiaries even after the grantor’s death or disability. The trust protector would then decide when and if the time is appropriate to provide the beneficiary with information regarding the trust.
Great Insurance Statutes:
South Dakota has several very favorable insurance statutes such as: in-kind distributions during lifetime and at death for larger PPLI policies, incorporation of certain changes in the PPLI policy contract allowing for greater flexibility for investment options, excellent retaliatory tax provisions, good insurable interest definition, lowest premium tax for LLCs and one of the lowest for trusts (discussed below), etc.
One of the Lowest State Premium Taxes in the U.S.:
South Dakota’s 8 basis point premium tax is the lowest in the U.S. for insurance policies held in South Dakota LLCs and one of the lowest for policies in trust. The average U.S. premium tax is 200 basis points (i.e., 2%). Massachusetts, New York, and New Jersey are all 200 basis points; Florida is 175 basis points; Nevada is 350 basis points; and California is 235 basis points. As a result of the low premium tax, many advisors and grantors have utilized South Dakota in purchasing their insurance policies onshore rather than in an offshore jurisdiction due to the recent taint and compliance issues (FATCA, FBAR, CRS) associated with accounts offshore.
Top-Rated Self-Settled Trust/Domestic Asset Protection Trust (DAPT) Statute:
In a self-settled trust, the grantor can be a permissible discretionary beneficiary, which is only allowed in 17 states, like South Dakota. South Dakota is rated as having one of the top DAPT statutes. South Dakota has one of the shortest fraudulent conveyance periods at 2 years as well as a “clear and convincing” burden of proof as to the specific creditor. An intent to hinder, delay, or defraud must be proved. Additionally, South Dakota has many other beneficial asset protection statutes, for example, its court privacy statutes (i.e., automatic total seal in perpetuity), a statute that provides for the reimbursement of legal fees to the trustee if the lawsuit is unsuccessful, an exclusive jurisdiction statute, etc. All these statutes, along with the top rated discretionary interest and top rated LLC statutes (both discussed below) make South Dakota a top asset protection jurisdiction by providing several key layers of asset protection.
Best Asset Protection for Discretionary Trusts:
South Dakota was the first state in the U.S. with a “Discretionary Support Statute.” South Dakota codified the common law and Restatement (2nd) of Truts, which defines the types of interests a beneficiary has in a trust and therefore the rights of a beneficiary’s creditors. The South Dakota statute is the most powerful in the U.S. Alaska, Delaware, and Nevada all have more limited statutes. Under South Dakota law, a discretionary interest in a trust is not a property interest nor an entitlement. Additionally, limited powers of appointment and remainder interests are also not property interests. This can become extremely advantageous from an asset protection standpoint.
Top Rated LLC/LP Asset Protection Statutes (Charging Order as the Sole and Exclusive Remedy) [and] Sole Member Statute:
South Dakota is one of the leading jurisdictions for LLC/LP asset protection. It has “charging order” protection as the sole and exclusive remedy which is generally considered the most desirable. A charging order only gives a creditor the rights of a partnership or LLC interest, and it does not give a creditor any voting rights. A charging order is simply a right to a distribution, if and when one is ever made, and it leaves a creditor without any means to force a distribution. Additionally, South Dakota has a “sole member” statute allowing for the trustee to be the sole owner of the LLC. This is a very powerful combination particularly when coupled with South Dakota’s trust statutes and other asset protection statutes.
Top-Rated and Unique Dynasty Purpose Trust Statute (Unique Statute):
South Dakota has one of the top dynasty purpose trust statutes in the U.S. In fact, South Dakota is one of the few states that allow for purpose trusts to be established for any lawful purpose, not just for pets or honoraries. The purpose trust does not have beneficiaries; its sole purpose is to care for an asset, such as a PFTC. Additionally, South Dakota is unique in that it allows for a perpetual purpose trust (i.e., the purpose trust has no restriction as to length of time it can be in existence). Some states limit the duration of a purpose trust, for instance to a term of years or to the end of the life of the pet.
Excellent Statutes for working with International Families:
South Dakota is frequently chosen as a favored trust jurisdiction for international families looking for U.S. trust situs due to SDTC’s experience dealing with international clients as well as South Dakota’s very favorable statutes, such as Trust Protector, forced heirship, privacy, reformation/modification, decanting, asset protection, PFTC, etc.
SDTC has extensive experience in working with:
- NRA Dynasty Trust
- Standby pour-over Dynasty Trust (receptacle from a foreign trust)
- Foreign Grantor and Non-Grantor Trust holding offshore entities (with U.S. and/or offshore assets)
- Pre-Immigration Trust
- Foreign Law Trust – Change of situs
Proactive Governor and Legislature:
The South Dakota governor, legislature, and Trust Task Force have all been very responsive to the industry in regard to passage of modern and unique trust and related laws since 1983 but particularly from 1995 to present day. SDTC and its founders and management have played a key role in the development of this legislation. In fact, one of SDTC’s founders, Pierce McDowell, played a very prominent role on the Trust Task Force for more than two decades so that SDTC and the state of South Dakota may continue to best serve clients and their advisors.