South Dakota Trust Laws

South Dakota Trust Legislation

Trust Industry & Estates magazine has ranked South Dakota as one of the top states for trust law over the past ten years and as a leader in this area. According to advisor-friendly trust companies, South Dakota trust laws are essential for wealth migration. Compared to other states, South Dakota's legislature is in session yearly, allowing for more progressive and up-to-date action and oversight of trust legislation.

South Dakota was the first American state to allow trusts to last forever in 1983. The first state to have discretionary trust legislation for asset protection was also South Dakota, which passed the law just four years later.

The Dominance Of South Dakota Trust Law

Privacy

The public filing of trust documents is not mandated in South Dakota. A South Dakota court does not have to be notified of updates or modifications to a trust. In the state, privacy is valued highly. Delaware only offers a three-year seal and significantly less benevolent privacy rules.

Dynamic elements

Family members and their professional advisors share the trustee's traditional roles through directed or delegated trusts.

Taxation

South Dakota levies neither a state income tax nor a state capital gains tax for assets held in trust.

Delegated trusts and directed trusts

The trust's creators may instruct or designate a trust company to carry out distribution and/or investment recommendations of an outside advisor in line with South Dakota's legal trust legislation.

A corporate trustee administers the trust itself under directed trust or delegated trust arrangements, while the legacy advisor retains control over the assets and any investment fees they generate.

Autonomous trust industry

South Dakota has authorized legislation that forbids powers of appointment held by beneficiaries, judicial foreclosure and creditor attachment on beneficial interests in trusts, and reserved powers by a beneficiary. This law is also known as an asset protection trust.

Furthermore, a trust expressly excludes a power of appointment as a property interest. South Dakota was the first state with a discretionary trust law for asset protection. South Dakota is one of only a few states in the country that offers creditor protection for self-settled trusts.

This is a trust in which the client transfers assets and is the beneficiary. The client may retain some control over trustees or trust advisors, as well as certain disposition rights to the trust assets, and the trust assets may be protected from creditors.

South Dakota's Trust Laws

The United States is the Federal Republic made up of 50 states, a Federal District, and territories and possessions that a federal government manages with certain powers reserved to the states. South Dakota became the 40th state to become part of the Union in 1889.

The United States legal system, including South Dakota's, is based on English common law, and trust law is governed by state law. South Dakota has top-rated trust, privacy, tax, and asset protection laws, as well as a dedicated and cost-effective workforce, a strong economy, and a supportive state government.

Importantly, all of South Dakota's benefits, including most of the state's unique and innovative trust strategies for the affluent, can be enjoyed by families across the country and worldwide without the need for the family to live in the state. Fiduciaries and Trusts, South Dakota Codified Laws outline South Dakota trust laws.

Trust period

South Dakota has repealed the rule against perpetuities, allowing trusts to last indefinitely. Assets can be passed down from generation to generation if adequately structured.

Powers reserved

South Dakota does not have reserved powers legislation per se, but it does allow settlers to have broad control over certain types of trusts. The legislation lists criteria that would be insufficient for a settlor to exercise "dominion and control" over a South Dakota trust, causing the trust to fail.

Such instances include a settlor serving as trustee, holding unrestricted power to remove or replace trustees, receiving loans from the trust without interest or security, power to substitute property of equivalent value, and so on.

The settler may also have revocation and appointment powers. Furthermore, the settlor can act as the Investment Advisor and Distribution Advisor, directing the trustee accordingly.

Directed trust industry

South Dakota's law allows the appointment of investment trustees under the directed trust law. Trust advisors act in a fiduciary capacity and have the authority to direct the trustee in matters of trust. Distribution advisors, who act in a fiduciary capacity, may also be appointed and have the authority to direct the trustee's distributions.

Protectors may also be appointed to exercise certain powers but not to act in a fiduciary capacity unless the trust instrument states otherwise or provides an alternative. Family advisors may be appointed to advise or consult with the family fiduciaries but do not act in that capacity.

Law of discretionary interest

A beneficiary's discretionary interest is not a property interest or an enforceable right under the Discretionary Interest statute but rather a mere expectancy. Creditors may not compel trustees to distribute a discretionary interest.

Provisions for the spendthrift

A declaration in a trust that the beneficiary's interest will be held subject to a spendthrift clause. Trust is sufficient to prevent a person from voluntarily or involuntarily alienating a beneficial interest beneficiary. In the event the trust contains a spendthrift provision, no creditor is permitted to seek present or future mandatory distributions from the trust.

Beneficiaries' information disclosure

South Dakota's "quiet" trust law allows for information disclosure restrictions for the recipients.

Private trust companies (PTC)

South Dakota's PTC legislation allows private trust companies to provide trust services to a family group but not to the general public. PTCs must be licensed, but the regime is more streamlined than for public trust companies, requiring only one incorporator rather than three and three board members rather than five. There is also no requirement for a majority presence of board members at quarterly meetings, among other things.

Trusts for specific purposes

South Dakota's purpose trusts are legal for any lawful purpose and typically have purposes rather than beneficiaries. They can be both charitable and non-charitable. Non-charitable purpose trusts are commonly used to hold shares of private trust companies, operating companies, and other businesses.

When a purpose trust is terminated, the trustee must distribute any remaining trust property under the terms of the governing instrument. Both purposes and beneficiaries can be included in hybrid purpose trusts. When the interests of the purposes and the beneficiary's conflict, the trustees must keep separate shares for each and may be held liable by the beneficiaries if they do not.

Entities with a specific purpose

South Dakota permits establishing special purpose entities to serve as Protector, Investment Advisor, or Distribution Advisor. These entities must be appropriately structured to avoid U.S. estate tax inclusion issues.

Provision for a firewall

The South Dakota firewall legislation includes a governing law provision that requires all matters concerning the validity, construction, and administration of trusts with a South Dakota governing law clause to be determined by South Dakota's law, including the settler's capacity and trustees' powers.

The firewall legislation also includes a broad foreign law exclusion provision that prevents foreign law from invalidating trusts governed by South Dakota's law. This is where the law of a foreign country does not recognize trusts.

The trust violates any foreign rule of law or judicial order that gives effect to such rights. Under the U.S. Constitution's Full Faith and Credit Clause, judgments rendered by federal or state courts are entitled to recognition.

Licensing and regulation

The State Chartered Trust Companies are licensed and prudentially supervised by the Banking Division of South Dakota.

Facts About South Dakota Trust Laws

South Dakota became the first boutique dominion trust jurisdiction to be exempt from state income taxes in 1983. In the decades that followed, South Dakota's status as one of the top trust jurisdictions was secured by creating and adopting innovative modern trust laws.

Each new law introduced and enacted in South Dakota resulted in significant changes to the state's trust, asset protection, privacy, and tax laws, culminating in an unparalleled landscape for domestic and international families. Locals can quickly implement customized multi-generational planning with a level of flexibility and control not previously seen in the United States.

The best rule against perpetuity state (before 1986)

South Dakota allows Trusts to last indefinitely. South Dakota's legislation essentially codified the Murphy case, allowing for trusts with unlimited duration, to which the IRS (Internal Revenue Service) agreed.

With their dynasty trust RAP (Rule Against Penalties) provisions in term states (i.e150, 300, 360, 1000, etc.), other non-Murphy case states all risk future statutory and/or constitutional issues.

A South Dakota dynasty trust can last in perpetuity (i.e., indefinitely) and avoid additional federal and state death taxes and state income taxes on trust assets, with other asset protection at each generation.

Excellent, timely, and low-cost trust reforms/modification

Trust decanting, modification, and reform statutes in South Dakota are among the best in the country. The reform/modification process in the state is both cost-effective ($2,500) and timely (two to fourteen days), as well as highly private and allows automatic total seal in perpetuity statute.

These are valuable tools for changing the trust situation in South Dakota to benefit from the state's laws on trust, asset protection, privacy, and state income tax purposes.

South Dakota is a pure no-income-tax state

South Dakota has the most thorough privacy statute in the United States for trust matters involving the court, i.e., automatic total seal in perpetuity. This could include litigation, court-approved reform/modifications, or decants.

South Dakota – The Tax Haven

The 'Pandora Papers' leak, which was the assemblage of almost 12 million private financial records, revealed the biggest global tax havens of the powerful. It was also shown in the Pandora Papers that South Dakota has also become one of the world's most significant tax havens in the last few decades.

Special spousal property trusts

This is also known as a community property trust and is an excellent opportunity for income tax planning. South Dakota is only one of the states in the country with a statute that allows both residents and non-residents to create a one-of-a-kind community property trust.

Assets held by such a trust will be designated as community property, allowing individuals to achieve a 100 percent stepped-up cost basis of the assets held in the trust upon the death of the first spouse. This contrasts with the 50 percent stepped-up cost basis (on jointly owned assets) provided for in standard law states.

Trusts with delegated authority

South Dakota has some of the country's best "delegated" trust statutes. The unique trust laws of South Dakota allow a trustee to delegate certain responsibilities to other professionals and/or co-trustees.

Entity with a specific purpose

South Dakota is one of only two American states that recognize these entities by statute, making the state one of the most popular for Special Purpose Entities. Understand the advantages of forming a regulated Private Family Trust Company in South Dakota and an unregulated Private Family Trust Company in Wyoming and Nevada.

One-of-a-kind beneficiary legislation of quiet/notice

For various reasons, many families do not want one or more of the trust beneficiaries to be aware of the existence of a trust or the trust assets. South Dakota allows for beneficiary waiver of notice but also provides that the grantor, trust advisor, or trust protector may expand, restrict, eliminate, or otherwise modify the rights of beneficiaries to trust information through the terms of the governing instrument.

This legislature is one of a kind in that it allows a trust to remain secret from the beneficiaries even after the client's death or disability. The trust protector would then decide when and if it is appropriate to provide information to the beneficiary.

Great insurance statutes

South Dakota has several very promising insurance legislations, including

• In-kind distributions during life and at death for larger PPLI policies
• Incorporation of certain changes in the PPLI policy contract allowing for greater flexibility for investment options; excellent retaliatory tax provisions
• A good definition of an insurable interest is the lowest premium tax for LLCs
• One of the lowest for trusts

South Dakota Offers Favorable Trust Laws

South Dakota was the first state (1983) to utilize a trust that lasts perpetually, theoretically leaving behind the onerous federal transfer (gift, estate, and generation-skipping) tax system. Currently, thirty other states and the District of Columbia have joined the ranks of those providing long-term trust. A trust is permitted in twenty-one of these states and Washington, D.C., including South Dakota.

South Dakota is distinguished from the other states by its industry-leading modern trust and privacy laws and the absence of state taxation on the assets within the trust. Furthermore, South Dakota has one of the country's lowest insurance premium tax rates (eight basis points, or eight-tenths of one percent) and other very favorable insurance legislation.

The state's self-settled trust and third-party discretionary trust statutes are also excellent, allowing for excellent domestic asset protection planning. This legislation strengthens the spendthrift section and, as a result, is critical for trusts established to benefit one's family.

Furthermore, South Dakota has some of the best asset protection statutes for LLCs and L.P.s, with charging order protection as the sole remedy. If you need assistance filing or sending through your trust documents, you can contact a reputable mail forwarding service. Moreover, these professionals can assist you no matter where you are in the world, so you won't have to worry about missing any trust deadlines.