Trust and Estate Law: South Dakota Dynasty Trusts 101
September 11, 2015
Usually, estate planning involves the creation of an updated will, a health care directive, and assigning a power of attorney. But sometimes an estate needs more, especially when a large or growing inheritance is involved. Establishing a trust can provide families with another important estate planning tool to manage inherited wealth. A trust can increase control over the use and distribution of estate funds in the future and may also serve to minimize the tax implications to one's heirs. Estates that utilize trusts formed under South Dakota estate and trust law may enjoy these benefits and many others.
Understanding South Dakota trust law
Many states, including Minnesota, still have on the books some version of the arcane "rule against perpetuities." The rule against perpetuities— or “RAP” — essentially requires that a trust extinguish and funds be distributed within some limited period of time, typically less than 100 years from formation of the trust. In application, the rule has many complexities that risk the effectiveness of the trust and minimize long-term tax-savings that would otherwise exist if the trust could last longer.
Enter South Dakota trust law. In 1983, South Dakota abolished the rule against perpetuities. See SDCL §43-5-8 (“Rule against perpetuities not in force. The common-law rule against perpetuities is not in force in this state.”). This allowed for the creation of a true dynasty trust, a trust that lasts in perpetuity. While other states have followed suit and passed legislation permitting trusts to last for longer periods of time, South Dakota trust law is one of the few state schemes that permit perpetual trusts in the manner approved by the IRS. Properly implemented, a South Dakota dynasty trust is among the most powerful estate planning tools available today. Coupled with their perpetual duration, South Dakota dynasty trusts offer several distinct advantages that, when taken as a whole, position South Dakota trust law at the top of the pack, year after year, as one of the country’s most favorable for trust creation.
Tax advantages of South Dakota dynasty trusts
Of all the states that allow for true perpetual trusts, South Dakota is the only one that does not impose any type of tax on trust assets. Specifically, South Dakota has no state income tax, no capital gains tax, and no estate tax. Coupled with the federal estate tax exemption and Generation Skipping Tax (GST tax) exemption, $5.43 million in 2015 (and indexed for inflation), South Dakota’s tax climate creates what many feel to be an ideal environment for investments to grow and wealth to accumulate in a way that will provide for many generations to come. For actively managed trusts that routinely buy and sell assets, or for trusts that are funded with assets that have a low cost basis, avoiding state income tax on gains is a significant benefit that cannot be overstated.
South Dakota dynasty trust litigation benefits
There are times when disagreements arise regarding trust issues, and this can even lead to litigation involving South Dakota dynasty trusts. South Dakota courts provide a strong forum to resolve these disputes. Access to the courts is better in South Dakota than most other locations and parties can usually predict a reliable pace for litigation. In addition, South Dakota dynasty trust litigation comes with added assurances of privacy and confidentiality because of specific protections offered by South Dakota law.
As a general rule, court filings are a matter of public record and are easily accessible to the public. But in South Dakota, the court is required to seal court filings and orders relating to trust actions if requested by a living trustor or by any fiduciary or beneficiary. See SDCL §21-22-28. Once sealed, the documents are generally protected in perpetuity and will not be made available to the public. This is in contrast to other jurisdictions, many of which do not permit sealed filings at all. Even Delaware, another state with favorable sealing laws, only permits sealing of filed documents for three years. See Del. Ch. Ct. R. 5(g). This ability to perpetually seal estate planning documents and resulting disputes is a differentiating factor that has resulted in many trustors choosing to form their trusts under South Dakota law.
Additional South Dakota dynasty trust benefits
South Dakota offers numerous other benefits to anyone looking to establish a trust. Its modern trust laws provide for very effective and flexible trust administration. Its decanting, modification, and reformation statutes are regarded as some of the best in the country. As a result, funds under management by South Dakota trustees have skyrocketed in recent years as wealthy out-of-state trustors routinely incorporate South Dakota dynasty trusts into their estate plans.
As the baby boomer generation is expected to transfer significant wealth to the next generation over the next ten to fifteen years, the largest generational transfer of wealth that the country has ever experienced, South Dakota dynasty trusts will remain a preferred tool to facilitate wealth transfer. If one is looking to minimize tax obligations or provide for one’s heirs while maintaining an increased level of control over the spending of future generations, all while protecting an estate from future creditors or ex-spouses, a South Dakota dynasty trust will do all this, and more.
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