Digging Deeper: 10 Advantages Of A South Dakota Dynasty Trust

When we hear the word “Trust” we often think of large estates and assets in the billions. Saying "Trust" is like saying car, there are thousands of different types of makes, models, and features. Trusts are not only for the wealthy. In fact, whether or not to set up a trust should never be based purely on your net worth. Trusts provide individuals and families the best protection during disability. They also lead to more cost-effective administration upon the death of a loved one and ease the time, stress, and chaos that often accompanies loss.

Trusts are also the best asset protection tools we have to protect you and your loved ones from divorce, creditors, remarriage, taxes, and keep your assets in your bloodline. Here are 10 advantages of a South Dakota Dynasty Trust.

Advantage #1 - Unending

Dynasty Trusts can last forever (at least in South Dakota). This provides you with the opportunity to protect your loved ones for generations to come - providing long lasting security.

Advantage #2 - Tax Efficiency

A Dynasty Trust may help to avoid and eliminate estate, income, gift, and generation-skipping transfer taxes

  • When assets pass to a beneficiary in an exempt Dynasty Trust, no matter what value the assets grow to and what the federal estate tax exemption is, when the beneficiary passes away the assets will pass estate-tax-free and probate-free down to the next generation.
  • If a Dynasty Trust is based in South Dakota, the assets can grow without a state income tax. As you may know, South Dakota has no state income tax. This results in substantial income tax savings for beneficiaries living in other states with higher state income taxes.
  • South Dakota has no state estate or inheritance tax.  Due to these tax advantages and trust-friendly laws, South Dakota is one of the best states in which to situs your trust.

Advantage #3 - Shield Assets From Divorce

Dynasty Trusts can shield assets from divorce. Even though the beneficiary of a Dynasty Trust has access to trust assets for their needs, the beneficiary does not legally own the assets (the trust does). Therefore, upon a beneficiary’s divorce, the trust assets are protected and not subject to any divorce proceeding.

Advantage #4 - Shield Assets From Creditors

Dynasty Trusts can also shield assets from creditors. Assets held in a Dynasty Trust are owned by the trust and not the beneficiary, as such, they are not subject to creditors’ claims either.

Advantage #5 - Keep Assets In The Family

Dynasty Trusts can keep assets in the family. If it is your intent that assets stay in your family, then a properly drafted Dynasty Trust can ensure the line of succession is binding.

  • For example, if Tom (your son) passes away, his assets generally go to his spouse, Carla. If Carla then gets remarried to Chris. Chris now has a better right to Tom's assets than Tom's children. If Tom inherits through a Dynasty Trust, his assets would be held in trust for his children (not Chris' children). You may also allow Tom to leave a portion of his trust share to his spouse upon his death (such as 50% of the income) while still ensuring the principal passes down to the next generation.

Advantage #6 - Proper Management of Assets

Dynasty Trusts can ensure the proper management of assets. Dynasty Trusts may include provisions ensuring the assets are managed properly. This may mean the option to appoint a third-party trustee (such as a financial institution) or a trust protector to step in if trust assets are being mismanaged. Although a beneficiary may be his or her own trustee, there are many situations where appointing a third-party trustee or co-trustee is the smarter option.

Advantage #7 - Irrevocable, But Flexible

Dynasty Trusts are irrevocable, but flexible. If you create a Dynasty Trust for your child, it is irrevocable upon your death. While you are living, you still have the power to revoke or modify your child’s Dynasty Trust. However, a qualified estate planning attorney should be able to build in the flexibility you and your loved ones will need to account for life’s ever-changing landscape. This is generally accomplished through a lifetime limited power of appointment, a testamentary limited power of appointment, or a general power of appointment, depending on your needs and goals. No one has a crystal ball. A Dynasty Trust built only thinking of one generation is often short-sighted and often ties a beneficiary’s hands in unexpected ways leading to adverse consequences.

Advantage #8 - Long-Term Protection For Your Family

Dynasty Trusts can provide long-term protection for your family. Other common types of irrevocable trusts you may have heard about, such as Irrevocable Life Insurance Trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), Charitable Remainder Trusts (CRTs), and Qualified Personal Residence Trusts (QPRTs) are used to provide specific tax benefits. Dynasty Trusts combine tax-efficiency with asset protection to create a long-term planning strategy to protect your loved ones and leave a lasting legacy.

Advantage #9 - Leave More Than A Monetary Legacy

Dynasty Trusts leave more than a monetary legacy. These trusts may incentivize desirable behavior that leads to your beneficiaries being productive members of society. For example, you may set the Trust up to pay for your child’s college education. However, do you want to pay for your child’s education if they are not attending classes and instead are participating heavily in "social activities"? A Dynasty Trust may include language limiting the payment of educational expenses to ensure a beneficiary is wisely using the funds. Education incentives often require a beneficiary to attain a certain GPA before the trust will cover the expenses. Incentive provisions can also be used to help a beneficiary start or buy a business, purchase a home, get married, and live a life of fellowship.

Advantage #10 - Build Intergenerational Wealth

Dynasty Trusts can build intergenerational wealth. As assets are allowed to grow in a protected manner, you don’t lose substantial wealth to creditors, lawsuits, divorces, or other risks. This protection results in a growth percentage far exceeding assets held in other entity types (such as LLCs, Corporations, Partnerships, and owned individually).​

As you can see, Dynasty Trusts can be drafted in a variety of ways to fit your needs and goals. Not everyone will want or need every option a Dynasty Trust offers. However, having so many options helps create a more individualized plan that accounts for life’s unpredictability. While most people think Dynasty Trusts are only for wealthy families, the reality is that they are a great solution for many families looking to protect their loved ones and provide a lifetime of financial security.