Self-settled trusts are also allowed in the state. The South Dakota domestic asset protection trust shields assets from third-party liability, including spouses in a divorce proceedings, creditor claims and judgments, while allowing individuals establishing the trust to retain some control over trust assets, receive income and enjoy a discretionary benefit during their lifetime. South Dakota’s two-year fraudulent conveyance statute is among the shortest in the country.
In addition, South Dakota, with its powerful directed trust legislation, allows bifurcation of trust duties, enabling third parties to serve as distribution or investment advisors or protectors. These modern tools have reduced trustee liability, resulting in more reasonable trustee fees and advisor flexibility.
Fiscally Sound State
South Dakota’s progressive trusts laws are not the only reason it has been successful. South Dakota is fiscally sound and is constitutionally required to maintain a balanced state budget. It maintains a significant reserve in its general fund, a triple-A bond rating and a healthy surplus in its state retirement plan. In addition, industry professionals have come together to form the South Dakota Trust Association to help the state’s trust industry actively address regulatory, marketing and educational issues and to give back to the state’s community.
International Planning
With new international and IRS reporting requirements, cross-border clients are more likely than ever to benefit from South Dakota trust laws. The state is the perfect jurisdiction for families seeking the establishment or domestication of trusts, including non-resident alien dynasty trusts, self-settled trusts for pre-immigration planning, foreign grantor trusts, standby domestic dynasty trusts, domestic dynasty trusts and domestic trusts governed by foreign law. The domestication of offshore entities in South Dakota is also a growing trend. Likewise, international businesses and families are showing increased interest in creating public and private trust companies in the state.
Community Property Special Spousal Trusts
Effective July 1, South Dakota will offer the community property special spousal trust, a planning tool unavailable in most other states. Married settlors of these trusts avoid state taxation on undistributed retained income within the trust. The property is treated as community property at the death of the first spouse, receiving a 100% step-up in basis at date of death and avoiding federal capital gains on marital trust assets when sold.
The Story Continues
The South Dakota story has much to offer, yet much remains unwritten. As trust and tax laws change nationally and internationally, South Dakota will continue to be at the forefront of the trust industry. Unprecedented levels of wealth transfer in the U.S. and interest from the international community are poised to make the next chapter the most interesting one yet.