South Dakota Dynasty Trusts - The Basics (Part I)

 

An estate plan in South Dakota usually includes a Last Will & Testament, a health care directive, and a financial power of attorney. However, some estates may need more, especially when a large inheritance is involved. Creating a trust can provide families with another important estate planning tool to manage inherited assets. A trust can increase control over the use and distribution of estate funds in the future and may also minimize future taxes to your heirs. In fact, estates that use trusts formed under South Dakota law may enjoy these benefits and many others.

What is South Dakota trust law?

Many states still have the arcane "rule against perpetuities." The rule against perpetuities (RAP) essentially requires that a trust terminate and the funds be distributed within some specific period of time, often less than 100 years after the trust's creation. The problem with the RAP is that it may minimize long-term tax savings that would otherwise exist if the trust could last longer.

In 1983, the South Dakota Legislature abolished the RAP. This significant change allowed dynasty trusts - trusts that last in perpetuity - to be created. While other states have followed South Dakota's lead and passed legislation allowing trusts to last for longer periods of time, our state's trust law is one of the few state structures that allow perpetual trusts that have been approved by the IRS. As a result, a South Dakota dynasty trust is a powerful estate planning tool. Coupled with their perpetual duration, South Dakota dynasty trusts offer several advantages and provide one of the country’s most favorable trust creation environments.

What are a South Dakota dynasty trust's tax advantages?

South Dakota is the only state that does not levy any taxes on trust assets. In fact, South Dakota has no state income tax, no capital gains tax, and no estate tax. Combined with the federal estate tax exemption and Generation Skipping Tax (GST) exemption of $5.43 million in 2015, South Dakota’s tax structure creates an ideal environment for dynasty trusts.  

What are other benefits of a South Dakota dynasty trust?

Sometimes, disputes arise regarding trusts. These disputes can result in litigation. However, South Dakota courts provide a reasonable forum to resolve these disputes. Access to the courts generally moves quickly in South Dakota. Also, South Dakota dynasty trust law provides added privacy and confidentiality protections. In fact, this ability to perpetually seal estate planning documents and disputes is often a factor that results in many trustors forming their trusts under South Dakota law.

It is anticipated that the transfer of significant wealth will occur over the next decade. As a result, South Dakota dynasty trusts will remain a popular tool to assist in this wealth transfer. 

Scott Swier
Founding Member, Attorney At Law