What does your estate plan currently look like? Do you even have an estate plan set up yet? Having an updated estate plan is an important component of financial wellness, but in many cases, there are substantial legacy, tax, and asset protection goals that a properly structured estate plan can serve. With these goals in mind, the Trust Law Counsel team at Goosmann Law Firm looks to South Dakota’s unique and favorable trust laws as one of the preeminent locations in which to establish trusts. Our legal team is experienced in helping our clients understand and utilize this “South Dakota Advantage.” Let’s dive into what makes the South Dakota advantage so valuable.
What gives South Dakota an advantage?
South Dakota has a comprehensive statutory framework, establishing an industry that promotes grantor sovereignty. In other words, the State of South Dakota allows the trust creator maximum flexibility when drafting a trust instrument, allowing them a huge amount of control over what happens when they pass away.
What are some of the specific advantages of having a South Dakota trusts?
- Directed Trusts: South Dakota law allows the grantor, or trust creator, to divide trustee responsibilities between an administrative trustee (typically a professional trust company or financial institution hired to manage the day-to-day tasks of the trust), an investment advisor (to control investment decisions over trust assets), and a distribution advisor (to control when and how distributions are made from the trust). By dividing the traditional responsibilities three ways, a grantor can ensure that the appropriate individual or company manages each decision separately, rather than forcing one person to do it all. This also allows the grantor’s friends or family to play a role in administering the trust, without the administrative burden of daily trust administration.
- Domestic Asset Protection Trust: The so called Domestic Asset Protection Trust, or DAPT, can be used to protect a grantor’s assets from his or her creditors. The unique law allowing a grantor to set up an asset protection vehicle for him or herself is not available in most states, but South Dakota laws allow just such an instrument. Prior to the enactment of laws supporting DAPTs, the only way for a grantor to retain access to his or her assets while protecting them against creditors was to form a trust under foreign law in certain offshore jurisdictions. But now, under modern trust laws in several states, a grantor can avoid the need to form an offshore trust in sometimes corrupt or less favorable jurisdictions, and retain the benefits of US law and governance, while protecting assets for himself or herself.
- Dynasty Trusts: Another antiquated trust rule, which South Dakota has abolished, is the Rule Against Perpetuities. This rule stated that a trust must cease to exist after a certain period of time, often during the lives of the grantor’s grandchildren or great-grandchildren. In South Dakota, without this rule, a grantor can establish a trust set to benefit their family or a specific purpose for many years or into perpetuity.
- No State Income or Inheritance Tax: Not only does South Dakota law offer flexible and favorable trust administration, but because of its perennially low tax environment, South Dakota offers a favorable tax advantage to those grantors who select a South Dakota situs for their trust. In some cases, grantors can utilize South Dakota trusts to situs assets out of their personal income tax jurisdiction in another state. Furthermore, trusts paying taxes in the State owe no state income taxes so long as they maintain South Dakota situs. This combined with no risk of a large state inheritance tax at the passing of the grantor makes South Dakota one of the best trust tax jurisdictions in the nation.
How can you benefit from the South Dakota Advantage without living there?
The biggest hurdle to cross to establish South Dakota as the trust situs for any trust is the selection of a trustee. In order to qualify for South Dakota situs, a trust must be administered by a South Dakota resident trustee, whether individual or corporate. Because of this requirement, there are a number of highly qualified and capable companies in the State that can serve in this role. And, because of South Dakota’s directed trust framework, the in-state trustee need not manage all investment and distribution decision making, instead leaving that to someone else more qualified to make those decisions, whether in-state or out-of-state. Of course, depending on the goals for the trust planning at hand.
With one of our four Goosmann Law Firm locations in Sioux Falls our team is ready and willing to help you explore how the South Dakota Advantage can benefit your planning. If you need help navigating the complexities of estate planning or the South Dakota Advantage, contact Goosmann Law Firm at 855-909-4442.
