The U.S. is one of the world’s leading tax havens for high-net-worth individuals and businesses that are seeking to shelter their assets from taxes. The U.S. states of Alaska, Delaware, and Nevada are known for their tax-efficient legislations and well-developed trust laws. Since U.S. trusts are governed by state laws and not by federal laws, the state legislation governing trusts is a key determinant for choosing the location of a U.S. trust.
It is little known that South Dakota, a state in the central U.S., offers business-friendly regulations and a modern trust regime. Arranging a trust (i.e. a fiduciary agreement that entitles a third party to hold assets on behalf of a beneficiary) is a tax optimization practice which is often used by high-net-worth individuals and businesses.
South Dakota hosts several popular trusts, such as Jackie O. charitable trust, named after Jacqueline Kennedy Onassis, and Grantor Retained Annuity Trust, named after a billionaire family that partially owns the retail chain Walmart.
According to Bloomberg, wealthy families take advantage of tax-friendly South Dakota trust laws without even residing in the State. In order to administrate the trust, families only rent a postal address or a small office instead of relocating to South Dakota or depositing money at a local bank.
South Dakota is especially well known for its dynasty trusts, which are used for avoiding the federal estate tax.
Benefits for locating trusts in South Dakota
South Dakota is regarded as the premier state for locating trusts and trust companies for six reasons.
Firstly, South Dakota abolished the rule against perpetuities, which restricted the owners from controlling the future dispositions of their property.
Secondly, the trust legislation of South Dakota contains self-settled asset protection and spends thrift provisions.
Thirdly, the trust legislation of South Dakota simplifies the set up of trusts by allowing families to establish their own trust companies and control their investment decisions instead of relying on a bank trustee.
Fourthly, the trust legislation of South Dakota is regularly adjusted with the aim to continue attracting new trusts.
Fifthly, South Dakota provides trusts with extensive privacy protection. Upon the request of (i) a grantor, (ii) a trustee, or (iii) beneficiaries, the documents related to trusts can be sealed, thus avoiding public access to documentation regarding court proceedings and administration of trusts. Such a sealing arrangement ensures privacy of the trust creators and protects the assets from third parties, including former spouses and creditors.
Sixthly, South Dakota imposes extremely low or no tax related to the trusts. The state levies 0% tax on (i) individual income, (ii) corporate income, and (iii) capital gains. Furthermore, the state premium tax for insurance is only 0,08% on premiums that are greater than $100.000.
By creating an appealing environment for locating trusts, South Dakota became a “little tax haven on the prairie”.