NEWS

HomePW MagazineFeaturesThe South Dakota Story

The South Dakota Story

The casual observer has probably encountered a South Dakota story without even knowing it. Such stories have been told in “Dances With Wolves” and “The Revenant,” the television series “Deadwood” and Laura Ingalls Wilder’s book, “Little House on the Prairie.”

The next great story involves the massive transfer of wealth between generations and the preservation of that wealth through South Dakota’s compelling modern trust law tools. The state’s trust services industry has evolved to meet the demands of this wealth transfer, delivering more planning options, protection, control and flexibility than ever before. 

How It Started

In 1983, South Dakota repealed its rule against perpetuities, clearing the way for the dynasty trust, a multigenerational estate-planning tool that avoids federal and death estate tax for assets held in trust forever. Because South Dakota also does not have a state income tax, the dynasty trust also avoids taxation on undistributed, retained income across generations. 

Simultaneously, the banking and trust industries worked together to propel South Dakota’s trust industry forward. In 1997, then-Gov. William J. Janklow created the Governor’s Task Force on Trust Administration and Reform, bringing together representatives from the trust industry and state government to make South Dakota’s trust laws the best in the nation. The task force’s effectiveness is demonstrated by South Dakota’s progressive trust laws and the number of trust companies located in South Dakota. With 86 public and private non-depository trust companies, South Dakota leads the nation. 

Taxation: None

South Dakota has no corporate, trust or personal income tax. State taxes on an inheritance or transfers at death are constitutionally prohibited. 

Privacy

South Dakota has enacted legislation enabling grantors to limit beneficiaries’ rights to information. State law also protects trust documents in court proceedings by providing an automatic seal of court records in perpetuity. South Dakota’s powerful privacy provisions are more comprehensive than any other state and are one of many reasons why families and their advisors choose South Dakota. 

Other Trust Law Features

In addition to public trust companies, South Dakota is a leader in the chartering of private trust companies offering wealthy families the benefits of South Dakota trust law and in providing a regulated structure in which family wealth can be controlled. Private trust companies enable families to increase their involvement in managing wealth; limit personal liability of those individuals administering trusts; meet federal securities law exemptions; and manage taxes. 

The state has been at the forefront of trust reform, modification and decanting, allowing families to easily migrate older trusts from other states and foreign jurisdictions to modernize trust provisions.

 

Self-settled trusts are also allowed in the state. The South Dakota domestic asset protection trust shields assets from third-party liability, including spouses in a divorce proceedings, creditor claims and judgments, while allowing individuals establishing the trust to retain some control over trust assets, receive income and enjoy a discretionary benefit during their lifetime. South Dakota’s two-year fraudulent conveyance statute is among the shortest in the country.

In addition, South Dakota, with its powerful directed trust legislation, allows bifurcation of trust duties, enabling third parties to serve as distribution or investment advisors or protectors. These modern tools have reduced trustee liability, resulting in more reasonable trustee fees and advisor flexibility.

Fiscally Sound State

South Dakota’s progressive trusts laws are not the only reason it has been successful. South Dakota is fiscally sound and is constitutionally required to maintain a balanced state budget. It maintains a significant reserve in its general fund, a triple-A bond rating and a healthy surplus in its state retirement plan. In addition, industry professionals have come together to form the South Dakota Trust Association to help the state’s trust industry actively address regulatory, marketing and educational issues and to give back to the state’s community. 

International Planning

With new international and IRS reporting requirements, cross-border clients are more likely than ever to benefit from South Dakota trust laws. The state is the perfect jurisdiction for families seeking the establishment or domestication of trusts, including non-resident alien dynasty trusts, self-settled trusts for pre-immigration planning, foreign grantor trusts, standby domestic dynasty trusts, domestic dynasty trusts and domestic trusts governed by foreign law. The domestication of offshore entities in South Dakota is also a growing trend. Likewise, international businesses and families are showing increased interest in creating public and private trust companies in the state.

Community Property Special Spousal Trusts

Effective July 1, South Dakota will offer the community property special spousal trust, a planning tool unavailable in most other states. Married settlors of these trusts avoid state taxation on undistributed retained income within the trust. The property is treated as community property at the death of the first spouse, receiving a 100% step-up in basis at date of death and avoiding federal capital gains on marital trust assets when sold. 

The Story Continues 

The South Dakota story has much to offer, yet much remains unwritten. As trust and tax laws change nationally and internationally, South Dakota will continue to be at the forefront of the trust industry. Unprecedented levels of wealth transfer in the U.S. and interest from the international community are poised to make the next chapter the most interesting one yet. 

RELATED ARTICLES

Most Popular