Why South Dakota Is The Best State To House Your Trust
A trust is a great addition to a well-rounded estate plan. It allows you to house your assets in a protected vehicle and provides you with more control over the distribution of your wealth. While many discussions about trusts center on the unique type and characterization (living, revocable, irrevocable, testamentary, charitable remainder, etc.), they don’t focus on where that trust is housed.
When it comes to estate planning, not all states are built alike. Each has different tax laws and other legislation that directly impacts the way that a trust can function. South Dakota has more to offer than the peaks of Mount Rushmore, it’s state laws are structured in a way that allows trusts to thrive.
Today, our team will explore the key reasons why South Dakota is the best state to house your trust.
The name of the game: taxes
There aren’t too many ubiquitous aspects in the financial space, but taxes are certainly one of them. Taxes play a role in every aspect of your financial plan from income, to investing, charitable giving, retirement planning, estate planning, and yes, trusts. It’s important to implement proactive tax strategies into your financial plan to avoid an unnecessarily high tax burden. Here’s how the state of South Dakota can help you do that.
The first benefit of South Dakota is that it imposes no state income tax. All funds in private trusts can’t be taxed by the state, even if it produces income/gains, which significantly impacts the account balance. This means that any undistributed income or gains are covered under this tax shield.
Let’s look at an example to illustrate this point. If you had a trust in a high-tax state like New York, your trust would pay state income tax on any gains it made in the tax year. But in South Dakota, those gains are protected and not taxed until distribution.
In addition to no state income tax, South Dakota doesn’t charge capital gains tax for assets held in the trust. This means that the trust can grow in value while remaining tax-free—an important wealth-building benefit.
South Dakota isn’t a state that inflicts estate or inheritance tax. While estate taxes are becoming rarer, the lack of these taxes becomes especially important for beneficiaries who won’t have to worry about another tax wave as soon as they come into their inheritance.
Trusts, in general, bring more privacy to the estate planning process as most avoid probate—a public proceeding of your estate and its assets. But privacy isn’t always guaranteed as each state has its own laws on how trusts are created and managed. South Dakota has a unique set-up as it increases the privacy of the trust, adding more protection to the grantor’s wealth and wishes. Let’s take a closer look.
All records relating to the trust and its information, the grantor, the value, the beneficiaries, are perpetually sealed by the courts. This takes your estate plan out of the public eye and keeps it for you and your family.
Another unique law is that the grantor can restrict notice of the trust to beneficiaries during their lifetime. This means that the person who establishes the trust isn’t required to inform the beneficiary (or anyone else for that matter) of the trust. A beneficiary might not know about the trust for decades before the grantor passes away.
The real key here is that no one is required to know about the trust. This allows the grantor added privacy and protection as the trust is created and funded.
The rule of perpetuity
The definition of perpetuity is a security with no maturation date—think of it like an apple that never goes bad. Perpetuity allows for the generational distribution of wealth as the trust never “expires.” This enables trusts to function as a family heirloom, passed down as long as the funds last.
South Dakota is an anomaly when it comes to perpetuity as many states enact The Rule Against Perpetuities which generally restricts trusts to a duration of 80-100 years. Without that rule in place, any assets placed in a trust can last forever. As long as there are assets in the trust worth the cost of maintaining the structure, the trust could theoretically last hundreds of years.
With perpetuity, trusts may last as long as there is a purpose to do so and also encourages generational wealth without the burden of federal inheritance tax.
South Dakota allows grantors to change any provision within the trust without notice to any beneficiary or other party. The grantor is also not required to file a notice with any governing body, facilitating fluid planning during their lifetime.
An irrevocable trust normally doesn’t allow any modifications, amendments, or changes after it is created. But state law in South Dakota gives the trustee the ability to decant, or change the trust, creating added flexibility to the process. Decanting a trust is essentially creating a new trust. This can be done with relatively low cost as compared to other states and can provide a clean slate if the grantor experienced an unexpected change.
This law makes reformations simple and private which can be of great comfort to the grantor.
Strong asset protection
One of the most important aspects of maintaining wealth is adequately protecting it. South Dakota has asset protection clauses designed to protect the funds in a trust. There are laws that protect funds from ex-spouses, business partners, creditors, and more.
For creditors specifically, South Dakota has a two-year look-back provision which is the lowest in the country. This means that after two years have passed, creditors can’t come after the assets giving the grantor added control, flexibility, and, of course, protection.
Why consider South Dakota?
Estate planning is a big part of your financial plan. When done right, it allows you to organize, manage, and pass down your wealth in a way that is true to you and the goals you have for the future.
Trusts are a valuable resource for any estate plan and where those trusts are housed makes a big difference in how they function over time. South Dakota provides grantors, trustees, and beneficiaries important benefits to safeguard those assets for years to come. Between tax benefits, protection clauses, as well as increased control and privacy, South Dakota is a great state to maintain the legacy of your wealth.
Ready to learn more about establishing a trust in South Dakota? Our Wealth & Trust Officers are here to help! We love working with people on their estate plans and crafting trusts that fit their unique needs. Schedule a time to talk with us today.
First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity and after death. We help clients develop a financial roadmap to help simplify their financial future.
Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust, or its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.