The recent press release regarding the “Pandora Papers” at the end of 2021 placed the South Dakota trust industry in the spotlight. Though some press painted a negative picture, with broad brush strokes of fraud and criminal activity, a real look behind the scenes captures a very different landscape. Instead, the South Dakota trust industry is a well-regulated vault, accepting those family legacies that deserve the thoughtful protection of the state’s laws. So, why are South Dakota’s laws so protective of the family legacy?
South Dakota offers numerous advantages to its resident trusts. A few of the big ones include:
1) Dynasty Trust. In many jurisdictions, families setting up a trust must ensure full distribution of trust assets within a specified number of years, often restricting distributions from occurring more than 2-3 generations later. South Dakota has eliminated the so-called “rule against perpetuities” so that future generations can continue to benefit from the family legacy over an unlimited period of time.
2) Taxes. Though often described as tools used to avoid paying taxes entirely, trusts pay taxes, too. Bringing a trust to South Dakota, a jurisdiction with no state income or death taxes, ensures efficient tax planning, in many cases even for out of state residents in high tax jurisdictions.
3) Flexible Trust Planning. South Dakota’s legislators and lawmakers have long understood the importance of flexibility in trust planning, especially when planning for multiple generations. As such, the state’s laws protect the ability to modify or decant a trust (by transferring trust assets to a new trust with updated provisions). The law continues to evolve, keeping pace with modern lifestyles and needs to ensure that generational trusts continue to operate efficiently and in line with their creators’ intentions.
4) Directed Trusts. Given the complex, yet personal, nature of family trusts, South Dakota statutes, which allow the separation and allocation of fiduciary responsibility amongst multiple advisors can be a huge advantage when selecting independent and related fiduciaries. In combination with a statutorily recognized Special Purpose Entity (SPE) that limits the liability of a trust’s fiduciaries, South Dakota law allows for and protects family involvement in trust administration.
5) Trust Protectors. South Dakota statutes recognize the authority of a disinterested third parties with great power to interpret and amend the trust instrument while ratifying the fiduciaries’ actions and ensuring proper trust administration. These statutory powers can be a huge benefit, especially for irrevocable trust planning that may last for generations.
6) Asset Protection. South Dakota’s lawmakers continually work to improve the protection provided for so-called “asset protection trust” from and against the attachment of a beneficiary’s creditors. In addition, South Dakota recognizes the protections provided by a “self-settled” asset protection trust, in which the beneficiary of the trust and its creator are the same individual. Though the law does not provide protection against fraudulent acts, it provides a unique opportunity for forward-looking trustmakers.
7) Privacy. Family affairs deserve privacy. As such, South Dakota not only extends its privacy protections across potential trust litigation or court reformation but even allows for privacy from future beneficiaries, colloquially known as a quiet trust. This can be a useful tool for motivating future descendants to build their own lifestyles outside of a trust’s funding.
There are numerous advantages to placing your trust within South Dakota’s trust vault. In fact, South Dakota regularly is named a top trust jurisdiction in the United States. Despite the often negative press, the regulatory structures in South Dakota not only provide a protected destination for the family legacy, but allow the flexibility to control and setup a plan that is individualized to the needs of the family. If you’d like to learn more about how the advantages of South Dakota’s unique trust laws can benefit you, please let us know.
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