Modern Trust Laws
South Dakota has revolutionized the trust industry by becoming the most progressive trust law jurisdiction in the United States. These modern trust laws have created a new wealth management service paradigm that delivers direction and control to family’s focused on intentionally created generational wealth and opportunity.
Zero State Income Tax
South Dakota provides serious tax planning opportunities for client because it has no state income tax. An Incomplete Non-Grantor (ING) Trust potentially eliminates state income/capital gain. Clients with investment portfolios, other assets with significant appreciation, and those selling a business interest have the ability to significantly reduce income taxes via ING Trust planning.
Dynasty Trusts/No Rule Against Perpetuities
Many states have the rule against perpetuities that prevent trusts from lasting forever. This means that trusts will eventually have to distribute its assets which could trigger estate, gift, and generation-skipping tax liabilities. South Dakota revoked the rule against perpetuities which allows for the creation of Dynasty Trusts which are designed to exist in perpetuity to provide a substantial legacy for current and future generations while being free of estate taxes and protection against potential creditors and lawsuits.
Privacy
South Dakota is considered to have the best trust privacy and quiet trust statutes in the United States. It provides a total seal forbidding the release of any trust information to the public forever without the need to petition the court. Additionally, most states require trustees to inform a beneficiary of his or her beneficial interest in a trust at the age of 18. South Dakota allows the settlor, trust protector, and investment/distribution advisor the power to expand, restrict, eliminate, or modify the rights of the beneficiaries to discover information regarding a trust.
Asset Protection Trust
Only a minority of states, including South Dakota, have statutes permitting Domestic Asset Protection Trusts, which legally shield assets from creditor claims including spouses in a divorce proceeding and lawsuits while allowing the person who establishes the trust to retain some control over the assets and benefiting from the trust during his or her lifetime. It’s the best of both worlds.
Directed Trust Laws
Directed Trusts, codified and available in a minority of states, unbundle asset management and trust administration functions. Instead of one trustee overseeing all aspects of the Trust, control is put back into the hands of the settlors, beneficiaries, and their advisors. Through bifurcating responsibilities and liability, a directed trust creates a legal framework that allows clients to work with long-time trusted financial advisors in conjunction with an administrative trustee, rather than severing ties with the family financial advisor and handing all trustee functions to a corporate or individual trustee. It ensures the right people are performing the right jobs at the right time.
Decanting Laws
Not all states have decanting statutes, but those that do, such as South Dakota, permit “do overs.” Decanting is essentially distributing assets from an irrevocable trust to a new trust with different, and presumably more desirable and flexible terms, leaving the unwanted terms in the original trust and not binding on the assets. Whether it is transferring a trust from one state jurisdiction to another more favorable jurisdiction, a change in family circumstance or law, or a switch in the family’s needs, decanting allows for a streamlined option to get the trust the family needs without involving the court.
Foreign Grantor Trust Planning
Wealthy families from around the world are seeking U.S. trust solutions for a variety of reasons, including privacy and asset protection. A South Dakota Foreign Grantor Trust may be established as a “foreign” trust for U.S. tax purposes and, therefore, treated the same as an offshore trust, while availing itself of powerful U.S. trust laws. Failure of the “Court Test” or “Control Test,” as outlined by the IRS, will result in the trust being treated as a non-U.S. entity and, therefore, not subjecting it to U.S. taxation. Since the trust is considered a South Dakota trust for legal purposes, the state’s industry leading dynasty trust, asset protection, and privacy laws may also be incorporated into the trust.
Low Insurance Premium Tax
An insurance premium tax is a tax that is levied upon insurers, both domestic and foreign, for the privilege of engaging in the business of providing insurance in the state. Most states in the country have an insurance premium tax between 150 and 250 basis points. Nevada’s tax is 350 basis points, and Delaware’s tax is 200 basis points. South Dakota has one of the lowest in the country at 8 basis points, meaning that the purchase of insurance through a South Dakota trust will result in substantial tax savings.
Special Purpose Entities
By sheltering from personal liability both the individuals serving within the directed trust structure (investment and/or distribution committee members) and the trust protector, this powerful planning tool safeguards against claims connected to their duties in this capacity. Most SPEs are structured as South Dakota LLCs. Therefore, the people serving in these roles are agents or employees of the South Dakota LLC vs. serving individually as residents of their home state. This further ties SPE members and employees to South Dakota situs for asset protection/wealth preservation and income taxation purposes.
Family Advisor
The Family Advisor, specific to South Dakota, is an excellent option for settlors of trusts and beneficiaries who may want family advisors, such as attorneys, CPAs, or investment advisors, to have some control and input over important aspects of trust administration without elevating the position to that of a fiduciary, which carries with it heightened liability that may deter advisors from serving.
Spousal Community Property Trust
Avoids federal capital gains taxation of marital/trust assets when subsequently sold. In non-community property states, the step-up in basis at date of death is only 50%, which means that taxes would be owed on the remaining 50% of the cost basis of the marital property when sold.
Trust Protector
The inclusion of a Trust Protector allows the settlor, beneficiaries, and their advisors to modify, update, and control many important aspects of the trust and provide direction to the trustee with respect to investment management, jurisdiction, and trust distributions. Acting as a “super trustee,” the Trust Protector concept enhances the control aspects of the Directed Trust because it provides for direction or restraint of powers of the trustee.
Purpose Trust
Unlike traditional trusts, the South Dakota Purpose Trust is a type of trust which has no beneficiaries. A Purpose Trust can be established to hold and protect assets for a specific purpose and not for benefit of beneficiaries. the Purpose Trust can be created to support or maintain a specific purpose, in perpetuity uniquely under South Dakota law.