Trusts are essential estate planning tools to help protect your loved ones and preserve wealth for future generations.
However, not everyone is aware that their trust’s location can significantly impact their estate. That’s because the levels of flexibility, tax advantages, asset protection, and other benefits vary by state, existing statutes, and case precedents.
South Dakota has consistently ranked as one of the most progressive trust jurisdictions in the country. With the highest number of trust company charters in any state, South Dakota’s legislature has made a concerted effort to develop trust laws that protect trust companies, trustees, and beneficiaries.
Learn more about the benefits of setting up trusts in South Dakota so you can make an informed decision in collaboration with your estate planning team.
Experience Greater Flexibility and Control Over Your Assets
South Dakota’s trust laws provide a significant advantage in terms of flexibility and control. Even if your trust is irrevocable, you can make modifications. The state also allows for easy decanting (moving assets from one trust to another) for trust issues that cannot be resolved through non-judicial modification. South Dakota is one of the few jurisdictions that allow you to opt into community property laws via trust, which can be a powerful planning strategy.
Attorney fees in South Dakota are relatively inexpensive, access to the court is typically swift, and non-judicial settlement agreements (NJSAs) are a viable option. There is also no limit to the length of a trust set up in South Dakota. This means that your assets are free to grow without a transfer tax liability for the benefit of multiple generations. For comparison, Nevada and Florida have trust duration limits of 365 and 360 years, while Delaware offers unlimited personal use but a 110-year limit for real estate trusts.
South Dakota is also one of a handful of states with a directed trust statute. The design of directed trusts allows for greater control over how your trust assets are managed and distributed. The many duties of a trustee are divided to allow different people to take on specific functions, including the following:
- Investment trustees oversee all investment decisions and give directives to Administrative trustees
- Distribution trustees make all determinations on the transfer of assets and provide directives to Administrative trustees
- Administrative trustees execute directives and handle the ministerial duties of trust administration
- Trust protectors help to ensure that the wishes of grantors are carried out but do not act as fiduciaries, unless they are performing a fiduciary role
- Family advisors provide advice to the trustees but cannot direct management of trusts
Enjoy Superior Privacy Rules, Asset Protection & Taxation Benefits
South Dakota’s privacy statute automatically and perpetually seals all trust information from non-relevant persons, including names of beneficiaries, grantors, and trust assets. Grantors also have the power to decide which beneficiaries are entitled to trust information (and when). As grantor, you can stipulate that no beneficiaries are entitled, in which case trust information is provided to a Representative. There are ramifications if a person with this information shares it with another who is not entitled to it.
By adding a spendthrift clause to your third-party trust, the trust becomes the owner of its assets. This allows you to protect the assets from a potentially unreliable beneficiary and safeguard your estate against creditors or lawsuits. However, two key exceptions are pre-existing alimony and child support obligations. To address this issue, South Dakota enacted a discretionary support statute stating that discretionary interest in a trust is not an entitlement or property right.
Another significant advantage of South Dakota is that it does not tax trust income or capital gains. If trust income is distributed to a beneficiary, it is typically taxed at the beneficiary’s personal rate in their residence jurisdiction. Income not distributed is generally taxed at the trust rate based on trust location, also known as ‘situs,’ with some exceptions. Additionally, South Dakota offers the lowest insurance premium tax in the country. Speak with your CPA to help you fully understand the intricacies of South Dakota tax law.
Choose the State Ranked Best in the Nation for DAPTs
The primary objective of a domestic asset protection trust (DAPT) is to shield your assets from creditors. Also called a self-settled trust, you can serve as a grantor and a beneficiary of a DAPT in select states, including South Dakota. DAPTs must be irrevocable, include spendthrift language, incorporate the state’s laws, and include at least one trustee based there. If properly structured, funded, and managed, creditors cannot typically reach assets in a DAPT for claims against the grantor (since the grantor no longer owns the assets).
Initial funding of DAPTs is typically a completed gift using the grantor’s unified credit. The grantor can still manage trust investments, provided they are not the sole decision-maker. There is no limit to contributions, and—in South Dakota—you are permitted to contribute marital property. South Dakota is also the only state that exempts alimony if the trust is created correctly under its statute.
Other important considerations include:
- South Dakota offers a short look-back period of 2 years for creditors to pursue assets
- Transfers to DAPTs in fraud of creditors are prohibited
- DAPTs do not protect against pre-existing child or spousal support orders
- DAPTs may be ideal for people in high-risk professions—such as doctors, lawyers, and real estate owners—as well as anyone with accumulated wealth
Trust in the South Dakota Advantage
As the nation’s premier independent trust company, National Advisors Trust is committed to delivering complete trust services that empower advisors and families to protect and grow generational wealth.
We hold a national trust charter in all 50 states and a progressive South Dakota state charter that allows for greater flexibility, control, and customization in your estate planning solutions.
Reach out today to learn how we can support you with essential content, educational resources, and other tools to help your clients embrace the power of trusts.
