Community Property States allow a complete step-up in basis on marital property when the first spouse passes away.  This allows the surviving spouse to sell appreciated property without creating substantial income tax liability.  Although South Dakota is not a community property state, married couples may form a South Dakota Trust in which they designate certain marital property as community property in order to take advantage of the complete step-up in basis upon the first spouse’s passing.  In South Dakota, this community-property-style trust is called a Special Spousal Property Trust.

Changes in circumstances inevitably occur which were not initially contemplated by the grantor or accounted for in the rust instrument.  When this occurs, different states afford different solutions for maintaining the grantor’s wishes.  In South Dakota, if the grantor is alive, an irrevocable trust may be modified with the consent of the grantor and all beneficiaries.  If the grantor is deceased, then modification is permitted by consent of all beneficiaries unless the status quo must be maintained in order to carry out a material purpose of the grantor.  Judicial modification is also quick and inexpensive if no one objects to the modification.

A third option – decanting – allows a trustee to form a new trust with more favorable terms and then to relocate trust assets into the new trust.  This can be used as an efficient way to transfer a trust from one state’s jurisdiction to another, if needed, or to accelerate a remainder beneficiary’s interest under certain circumstances.  Decanting does not require consent from the court, the grantor, or the beneficiaries.  South Dakota’s decanting statute consistently ranks among the best decanting statutes in the country.

One advantage of placing assets into a trust is the avoidance of the public nature of probate proceedings.  But there are still two situations that threaten the privacy of the trust contents:

1. Privacy from Beneficiaries—the Quiet Trust. Sometimes a settlor will wish for her beneficiaries to live life and figure out success without relying on a large inheritance.  While most states require a beneficiary to me made aware of the eventual gift, South Dakota’s Quiet Trust statute allows settlors, trust protectors, and investment/distributions advisors the power to control what information is revealed to a beneficiary and when it is revealed.

Statutory Seals – Automatic and Perpetual Privacy When Courts Are Involved.  If the contents of the trust or its administration are litigated, or if the beneficiaries or trustee seeks judicial modification, the once private information may be thrust into the public domain. Settlors, trustees, and beneficiaries may request the court to seal the record and thereby keep the trust contents private. Generally, courts may grant or deny the request on a case-by-case basis. State statute will govern how long the record will remain sealed. In South Dakota, trust information that comes out in court is automatically sealed from the public, and no request is required. Furthermore, that seal is perpetual so that trust information never becomes public. South Dakota is the only state with an automatic and perpetual seal on trust information, making it the best trust privacy jurisdiction in the country.

The most significant tax advantage offered by South Dakota is that it does not collect income tax. This fact, combined with all the other trust laws, is what makes South Dakota such an attractive jurisdiction to establish trusts originating from other states.

For South Dakota residents who place assets in a South Dakota trust, not being taxed on the trust income is a given, regardless of whether it’s a grantor trust or non-grantor trust. It would make little sense to establish a trust in another state that imposes an income tax on its residents—unless, of course, the grantor simply doesn’t like money… But for residents from other states that have enacted a state income tax, grantors may place assets in a nonresident trust (a trust sitused and administered in a jurisdiction other than where the grantor or beneficiaries reside) in South Dakota in order to avoid paying state income tax on the trust income.  If the trust is administered in a state where there is no income tax (such as South Dakota), then the income produced by the trust assets is never taxed at the state level.

The Rule Against Perpetuities limits the time period a deceased person may retain control over his or her assets after death.  In 1983 South Dakota became the first state to abolish its Rule Against Perpetuities, which opened the door for grantors to retain perpetual control over assets by keeping them held in trust forever. In states with an existing Rule Against Perpetuities, these types of trusts would either be invalid from the start, or they would expire after the applicable period lapsed, forcing the trustee to distribute the assets held in the trust. In South Dakota, there is no time limit, so a trustee will never be forced to distribute assets to a beneficiary due to time expiration.

Dynasty Trusts are trusts with perpetual existence.  Because South Dakota has no Rule Against Perpetuities, South Dakota grantors may establish a dynasty trust to retain control over trust assets forever—or at least until a court decides that the burden of administering the trust outweighs the benefit for existing beneficiaries. Until then, grantors can use the dynasty trust statute to provide the gift that keeps on giving.

One of the biggest reasons people place assets into an irrevocable trust is for asset protection purposes. It’s easy for grantors to provide creditor protection for beneficiaries named in the grantor’s revocable living trust. But if the grantor desires creditor protection for herself, her right to control trust assets and to benefit from the trust will depend on state law. Historically, a grantor’s creditors could reach the assets of the trust to satisfy their claims if the grantor retained the right to benefit from the trust.

A Domestic Asset Protection Trust (“DAPT”) is used to protect a grantor’s assets from her creditors. Before DAPTs, the only way for a grantor to retain control of her assets while protecting them against creditors was to form the trust under foreign law in certain offshore jurisdictions. But Alaska, then Delaware, then South Dakota and several other states created a statutory block to creditors’ reach—DAPTs, which are now authorized in 17 U.S. states.

A DAPT is an irrevocable trust that still affords a large amount of control to the grantor while allowing the grantor to be a beneficiary of the DAPT. While DAPTS do not afford grantors the same level of control as that permitted in a revocable living trust, grantors still have significant powers of control and beneficiary rights. The trade-off is the assets held in the DAPT are off-limits to the grantor’s creditors. BUT this advantage cannot be enjoyed until the 2-year statute of limitations period for creditors bringing claims against the grantor has passed.

In some situations, a grantor’s wishes may be curbed by the traditional trust structure in which the grantor chooses a trustee who is responsible for holding and managing trust assets, prudently investing those assets, making distributions to beneficiaries, and carrying out the administrative duties of the trust (keeping records, filing tax returns, etc.). But sometimes a grantor may wish to remain involved in investment and distribution decisions without having to worry about the administrative duties. Alternatively, a grantor may wish for someone to serve as a trustee, but that person may be unwilling to serve in that capacity due to the accompanying fiduciary liability associated with serving as a trustee.

South Dakota and a few other states have legislated a different option called a directed trust. Directed trusts trifurcate the trustee responsibilities between an administrative trustee, an investment committee, and a distribution committee. By dividing the traditional responsibilities three ways, each party’s potential liability is reduced, and the administrative burden is lessened.

The directed trust model allows the grantor to appoint trusted individuals (or to appoint himself) as advisory committee members over asset investments and distributions.  The investment and distribution committees make investment and distribution decisions and give direction to an administrative trustee, who is obligated to follow that direction.  The administrative trustee has no fiduciary obligation to ensure the assets are prudently invested.  The administrative trustee’s duties are to follow the direction of the committees and to take care of trust administration, such as ensuring annual tax returns are filed.