South Dakota

•South Dakota has no limit on the life of its trusts;
•There is no South Dakota state income tax for the trusts or the individuals who are the trusts’ beneficiaries;
•South Dakota offers substantial protection from creditors of beneficiaries;
•South Dakota, as a part of the United States, governs only U.S. trusts, not foreign trusts, which can experience numerous difficulties with the U.S. testing authorities and other U.S. and foreign entities.


North Point Trust, South Dakota Trust, Dynasty Trust, Legacy Trust, Trustee, South Dakota Trust Company

South Dakota was a pioneer in “dynasty trusts,” which allow families to escape estate taxes forever. The state offers iron-clad secrecy for trusts and protection of assets from creditors and former spouses. It also has rules that make it easier for families to set up their own trust company, rather than rely on a bank trustee, and to enhance their control over trust investment decisions. An added attraction: South Dakota levies no state income taxes on investments.

In the past four years, the amount of money administered by South Dakota trust companies has tripled to $121 billion, almost all of it from out of state, according to the state’s Division of Banking. South Dakota is particularly adept at “creating laws that are conducive to a massive exploitation of a federal tax loophole,” says Edward McCaffery, a professor at the University of Southern California’s Gould School of Law. “We have a tax haven in our midst.”

The amount that can be put into a dynasty trust is usually limited by federal rules. The limit was about $1 million during the 1990s. Throughout the 2000s, the ceiling rose, reaching $5 million by 2011. The limit was scheduled to revert to $1.4 million at the end of 2012. McDowell says his clients rushed to meet the deadline during the last few months of 2012, creating billions of dollars’ worth of new trusts. He had to turn away customers and hire retirees to handle the crush of paperwork. By the end of the year, he says he’d added about 500 trusts to his rolls, more than twice the number in a typical year: “I call it the trust tsunami of 2012.”

The families needn’t have rushed: On Jan. 1, 2013, Congress made the $5 million limit permanent. While President Obama’s annual budget proposals have called for closing the dynasty trust loophole—many states now permit them—Congress has not done so.

For the richest families, even a $5 million dynasty trust represents only a fraction of their fortune, so lawyers have invented complicated strategies—one is an installment sale of assets to an intentionally defective grantor trust—to squeeze bigger sums into the vehicles, as much as $39 million, according to a presentation published by South Dakota Trust last year. McDowell’s firm now administers trusts valued at $14 billion, according to its website, almost all of them originating in other states.


South Dakota Dynasty Trusts: Tax Haven for Rich Families - Businessweek