The South Dakota Advantage
The South Dakota Trust Association boasts that South Dakota is routinely ranked among the best Trust Jurisdictions
in the United States. Over the past 30 years, South Dakota has become
one of the most progressive, comprehensive, and competitive trust law
jurisdictions in the country, as evidenced by the hundreds of billions
of dollars that are now held in trusts registered in the state.
South Dakota has a comprehensive statutory scheme surrounding its trust
laws that promote grantor sovereignty (the grantor’s ability to
control and benefit from his or her assets over time), privacy, asset
protection, and limited tax liability. Any South Dakota law touching on
any of these principles is scrutinized until it is a cohesive part of
the comprehensive scheme. This scrutiny, as well as innovative additions
to the statutory scheme, come from the Governor’s Trust Task Force,
a body of trust industry professionals tasked with making South Dakota
the premier trust jurisdiction in the country.
Most of the unique and creative trust strategies for the wealthy involve
trust administration in South Dakota without the necessity of having the
family reside there. Nonresident individuals who wish to take advantage
of South Dakota’s favorable trust laws may do so by naming a South
Dakota resident trustee (whether an individual or a corporate trustee)
and allowing the assets to be administered in the state. Not only can
such grantors use the many innovative, statutory trust options available
in South Dakota, but they may also enjoy South Dakota’s no-income-tax
regime, as supported by recent state and U.S. Constitutional law.
Whether you’re a South Dakota resident or you live in another state,
call a Goosmann Trust Law Counsel attorney today to discuss the South
Dakota advantage and explore how a South Dakota trust can be a beneficial
part of your comprehensive estate plan.
Advantages of South Dakota Trusts
In some situations, a grantor’s wishes may be curbed by the traditional
trust structure in which the grantor chooses a trustee who is responsible
for holding and managing trust assets, prudently investing those assets,
making distributions to beneficiaries, and carrying out the administrative
duties of the trust (keeping records, filing tax returns, etc.). But sometimes
a grantor may wish to remain involved in investment and distribution decisions
without having to worry about the administrative duties. Alternatively,
a grantor may wish for someone to serve as a trustee, but that person
may be unwilling to serve in that capacity due to the accompanying fiduciary
liability associated with serving as a trustee.
South Dakota and a few other states have legislated a different option
called a directed trust. Directed trusts trifurcate the trustee responsibilities
between an administrative trustee, an investment committee, and a distribution
committee. By dividing the traditional responsibilities three ways, each
party’s potential liability is reduced, and the administrative burden
The directed trust model allows the grantor to appoint trusted individuals
(or to appoint himself) as advisory committee members over asset investments
and distributions. The investment and distribution committees make investment
and distribution decisions and give direction to an administrative trustee,
who is obligated to follow that direction. The administrative trustee
has no fiduciary obligation to ensure the assets are prudently invested.
The administrative trustee’s duties are to follow the direction
of the committees and to take care of trust administration, such as ensuring
annual tax returns are filed.
One of the biggest reasons people place assets into an irrevocable trust
is for asset protection purposes. It’s easy for grantors to provide
creditor protection for beneficiaries named in the grantor’s revocable
living trust. But if the grantor desires creditor protection for herself,
her right to control trust assets and to benefit from the trust will depend
on state law. Historically, a grantor’s creditors could reach the
assets of the trust to satisfy their claims if the grantor retained the
right to benefit from the trust.
A Domestic Asset Protection Trust (“DAPT”) is used to protect
a grantor’s assets from her creditors. Before DAPTs, the only way
for a grantor to retain control of her assets while protecting them against
creditors was to form the trust under foreign law in certain offshore
jurisdictions. But Alaska, then Delaware, then South Dakota and several
other states created a statutory block to creditors’ reach—DAPTs,
which are now authorized in 17 U.S. states.
A DAPT is an irrevocable trust that still affords a large amount of control
to the grantor while allowing the grantor to be a beneficiary of the DAPT.
While DAPTS do not afford grantors the same level of control as that permitted
in a revocable living trust, grantors still have significant powers of
control and beneficiary rights. The trade-off is the assets held in the
DAPT are off-limits to the grantor’s creditors. BUT this advantage
cannot be enjoyed until the 2-year statute of limitations period for creditors
bringing claims against the grantor has passed.
No Rule Against Perpetuities – Dynasty Trusts
The Rule Against Perpetuities limits the time period a deceased person
may retain control over his or her assets after death. In 1983 South Dakota
became the first state to abolish its Rule Against Perpetuities, which
opened the door for grantors to retain perpetual control over assets by
keeping them held in trust forever. In states with an existing Rule Against
Perpetuities, these types of trusts would either be invalid from the start,
or they would expire after the applicable period lapsed, forcing the trustee
to distribute the assets held in the trust. In South Dakota, there is
no time limit, so a trustee will never be forced to distribute assets
to a beneficiary due to time expiration.
Dynasty Trusts are trusts with perpetual existence. Because South Dakota
has no Rule Against Perpetuities, South Dakota grantors may establish
a dynasty trust to retain control over trust assets forever—or at
least until a court decides that the burden of administering the trust
outweighs the benefit for existing beneficiaries. Until then, grantors
can use the dynasty trust statute to provide the gift that keeps on giving.
No State Income Tax
The most significant tax advantage offered by South Dakota is that it does
not collect income tax. This fact, combined with all the other trust laws,
is what makes South Dakota such an attractive jurisdiction to establish
trusts originating from other states.
For South Dakota residents who place assets in a South Dakota trust, not
being taxed on the trust income is a given, regardless of whether it’s
a grantor trust or non-grantor trust. It would make little sense to establish
a trust in another state that imposes an income tax on its residents—unless,
of course, the grantor simply doesn’t like money… But for
residents from other states that have enacted a state income tax, grantors
may place assets in a nonresident trust (a trust sitused and administered
in a jurisdiction other than where the grantor or beneficiaries reside)
in South Dakota in order to avoid paying state income tax on the trust
income. If the trust is administered in a state where there is no income
tax (such as South Dakota), then the income produced by the trust assets
is never taxed at the state level.
One advantage of placing assets into a trust is the avoidance of the public
nature of probate proceedings. But there are still two situations that
threaten the privacy of the trust contents:
Privacy from Beneficiaries—the Quiet Trust. Sometimes a settlor will wish for her beneficiaries to live life and figure
out success without relying on a large inheritance. While most states
require a beneficiary to me made aware of the eventual gift, South Dakota’s
Quiet Trust statute allows settlors, trust protectors, and investment/distributions
advisors the power to control what information is revealed to a beneficiary
and when it is revealed.
Statutory Seals – Automatic and Perpetual Privacy When Courts Are Involved. If the contents of the trust or its administration are litigated, or if
the beneficiaries or trustee seeks judicial modification, the once private
information may be thrust into the public domain. Settlors, trustees,
and beneficiaries may request the court to seal the record and thereby
keep the trust contents private. Generally, courts may grant or deny the
request on a case-by-case basis. State statute will govern how long the
record will remain sealed. In South Dakota, trust information that comes
out in court is automatically sealed from the public, and no request is
required. Furthermore, that seal is perpetual so that trust information
never becomes public. South Dakota is the only state with an automatic
and perpetual seal on trust information, making it the best trust privacy
jurisdiction in the country.
Flexible Decanting and Reformation Statutes
Changes in circumstances inevitably occur which were not initially contemplated
by the grantor or accounted for in the rust instrument. When this occurs,
different states afford different solutions for maintaining the grantor’s
wishes. In South Dakota, if the grantor is alive, an irrevocable trust
may be modified with the consent of the grantor and all beneficiaries.
If the grantor is deceased, then modification is permitted by consent
of all beneficiaries unless the status quo must be maintained in order
to carry out a material purpose of the grantor. Judicial modification
is also quick and inexpensive if no one objects to the modification.
A third option – decanting – allows a trustee to form a new
trust with more favorable terms and then to relocate trust assets into
the new trust. This can be used as an efficient way to transfer a trust
from one state’s jurisdiction to another, if needed, or to accelerate
a remainder beneficiary’s interest under certain circumstances.
Decanting does not require consent from the court, the grantor, or the
beneficiaries. South Dakota’s decanting statute consistently ranks
among the best decanting statutes in the country.
Special Spousal Property Trust (A.K.A. Community Property Trusts)
Community Property States allow a complete step-up in basis on marital
property when the first spouse passes away. This allows the surviving
spouse to sell appreciated property without creating substantial income
tax liability. Although South Dakota is not a community property state,
married couples may form a South Dakota Trust in which they designate
certain marital property as community property in order to take advantage
of the complete step-up in basis upon the first spouse’s passing.
In South Dakota, this community-property-style trust is called a Special
Spousal Property Trust.