With a population of less than a million, South Dakota is rapidly becoming one of the country's most friendly trust-and-estate jurisdictions. In an era when the economy is tentative, the financial services industry is challenged and the laws regarding trusts and taxes are uncertain, the best advice you can give your clients is to keep their options flexible. South Dakota's trust laws offer the greatest overall flexibility and choice of administrative options in the country.
- No state level income or capital gains tax
- Grantors determine how long their trusts will last, No Rule Against Perpetuities
- Asset protection planning
- Modern trust laws provide great flexibility
- Privacy- court documents sealed in perpetuity (unique to SD)
- Accessibility to legal system- courts are generally open and not subject to delays
South Dakota has been rated "Best Trust Jurisdiction" in the U.S. by Trust & Estates magazine; 2007, 2010, 2012, 20141
South Dakota Has No "Rule Against Perpetuities."2
In 1983 South Dakota enacted legislation declaring that that "[t]he common-law rule against perpetuities is not in force in this state," the rule against perpetuities was abolished. This means that trusts set up in South Dakota can jump outside of the federal transfer tax system in perpetuities, forever! The significance of this is that South Dakota abolished the rule prior to 1986, the imposition of the modern generation skipping transfer tax. What is the significance? "In 1979, in Murphy v. Commissioner, the Tax Court affirmed Wisconsin's method of repealing its Rule Against Perpetuities. This has since become known as the 'Murphy Approach'. The Murphy approach is considered the best perpetual trust jurisdiction law method. South Dakota is the only original murphy jurisdiction!"3
Perpetual trusts offer the opportunity to avoid transfer tax, but that is not the sole attraction. Along with tax benefits, these trusts potentially have the ability to converse and accumulate wealth for future generations and protect beneficiaries against creditors and predators. All of this equates to an efficient administration of trust assets over many generations, as well as the possibility of minimizing or avoiding Federal estate taxes.
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Asset Protection Planning4
A Domestic Asset Protection Trust ("DAPT") is an irrevocable trust established under the laws of South Dakota that allow the settlor of the trust to be a discretionary beneficiary and yet still protect the trust assets from the settlor's creditors. The key points are:
- South Dakota has statutes protecting DAPT assets after only two years from the date of transfer to the trust with respect to non-preexisting creditors.
- South Dakota allows divorcing spouses, alimony, and child support creditors as exception creditors.
- Coupled with an SD LLC/LP gives added protection of a sole remedy charging order – LLC Statutes
- Coupled with Modern Trust laws give flexibility
SD DAPT coupled with a SD Charging Order: Ultimate Protection
When creating a DAPT, one must consider the location of the trust property. The location can be an impediment to a creditor attack if not structured properly. When South Dakota's LLC/LP statutes are used in conjunction with SD DAPT statutes, further protection is added. South Dakota provides a "sole remedy charging order" which offers the greatest protection for SD LLC/LP. A charging order is simply a lien. A creditor will obtain a personal judgment against the member of an LLC or a partner of an LP. Typically the creditor gets a charging order, or lien, against the member or partnership interest. In doing so, the creditor cannot access the underlying assets even if the DAPT fails to work. The charging order only gives the creditor the rights of a partnership or LLC; it does not give the creditor any right to vote. A charging order is simply a right to a distribution, if and when one is ever made, and it leaves a creditor without any means to force a distribution. This can results in a standoff between the client and the creditor. This will usually force the creditor to settle for significantly less than the original judgment amount.
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Modern Trust Laws5
South Dakota's trust statutes provide great flexibility in both planning and administration.
Directed Trust Statutes
The concept of a directed trust dates back to the mid-1980s. A directed trust is a trust where the traditional, common-law duties of a trustee are divided into separate roles for trust administration, investment management, and distribution management. The persons filling the investment and distribution management positions act in conjunction with an administrative trustee to implement the trust's terms. The directed trust gives our clients the greatest flexibility in document creation and planning. A directed trust is a useful tool in estate planning because it provides the settlor with the opportunity for greater family input and flexibility.
Although the use of a Trust Protector has been available with regard to offshore trusts for many years, it wasn't statutorily available until 1997 when South Dakota enacted the first statute. It is common to have a Trust Protector provision included in trusts that are administered in states that do not have Trust Protector statues. The role of the Trust Protector is important in providing flexibility to address unforeseen changes in the family dynamics or in the laws.
- Modify or amend the trust instrument to achieve favorable tax status or respond to changes in the Internal Revenue Code, state law, or the rulings and regulations thereunder;
- Increase or decrease the interests of any beneficiaries to the trust;
- Modify the terms of any power of appointment granted by the trust. However, a modification or amendment may not grant a beneficial interest to any individual or class of individuals not specifically provided for under the trust instrument;
- Remove and appoint a trustee, a fiduciary provided for in the governing trust instrument, trust advisor, investment committee member, or distribution committee member;
- Terminate the trust;
- Veto or direct trust distributions;
- Change situs or governing law of the trust or both;
- Appoint a successor Trust Protector;
- Interpret terms of the trust instrument at the request of the trustee;
- Advise the trustee on matters concerning a beneficiary;
- Amend or modify the trust instrument to take advantage of laws governing restraints on alienation, distribution of trust property, or the administration of the trust; and
- Provide direction regarding notification of qualified beneficiaries pursuant to SDCL 555-2-13
1 See Daniel G. Worthington and Mark Merric, "Which Trust Situs is Best in 2014?" Trust & Estates (January 2014) p. 53; Daniel G. Worthington and Mark Merric, "Which Situs is Best in 2012?" Trust & Estate (January 2012) p. 51; Daniel G. Worthington and Mark Merric, "Which Situs is Best?" Trust & Estates (January 2010) p. 54; Daniel G. Worthington, "Latest Perpetual Trust States – Latest Rankings" Trust & Estates (January 2007) p. 59
2 South Dakota - S.D. Codified Laws §§ 43-5-8
3 Trusts and Estates, January 2014.
4 SDCL 55-16
5 SDCL 55-1B
6 SDCL 55-1B-6