Several states have established trust laws that compare with South Dakota, which provides the opportunity to compare the differences.
A small but mighty state, Delaware is well known for its corporate law and has a long history of trust planning. However, South Dakota’s modern trust laws provide an advantage over Delaware’s in the areas of asset protection, privacy and efficiency.
Asset Protection
South Dakota has outpaced the competition by providing some of the clearest and strongest asset protection features for its trust laws. In other states, case law, and the opinions written by individual judges, have led to a variety of standards and unpredictable results. South Dakota leads the nation by providing clear language in statute that can be incorporated right into the trust document. Trust drafting that includes “discretionary beneficiary” language as found in South Dakota trust law gives the beneficiaries additional protection.
South Dakota law provides that, when properly drafted, discretionary beneficiaries do not have an income interest nor property interest. Beneficiaries can still receive income and principal at the discretion of their Distribution Trust Advisor, but creditors face significant hurdles to collection when there is no income interest and no property interest. Some beneficiaries have determined they are not worried about judgments, so they would prefer an enforceable right to the income and principal. South Dakota is one of a handful of states to include a Covey provision, which allows the trust document to provide a beneficiary provision that is drafted specific to the beneficiary needs. The flexible drafting options, unique to South Dakota, provide an advantage over Delaware.
Privacy
The privacy provisions in South Dakota also exceed those afforded grantors and beneficiaries, by Delaware trust statutes. Trusts in South Dakota are automatically perpetually sealed. Directed dynasty trusts that are designed for perpetual duration would have be sealed for a similar timeframe. Delaware allows a trust to be sealed for only three years. This privacy protection, requires trusts to petition the court leaving the decision to judicial discretion. In contrast, South Dakota prevents the privacy decision from landing on the desk of a single judge. All trusts and actions related to the assets or parties to the trust are outside of the public record. This privacy feature alone has been a popular factor for moving trusts to South Dakota.
Modification and Decanting
Trusts that include significant legacy planning involve decisions made in the present that may impact individuals years in the future. As a result, some grantors are reluctant to make a decision they believe cannot be changed. South Dakota has addressed that concern by providing broad powers to modify, decant and reform trusts. This can be used for simple corrections or to address larger issues that arise as tax laws change, the economy changes, or challenging issues arise in the family dynamic. South Dakota gives power to the drafting attorney to determine who has the authority to modify and how much authority they may exercise. The divided roles in a directed trust provide several options: the administrative trustee, investment trust advisor, distribution trust advisor and trust protectors can all be provided the authority to make necessary changes. South Dakota also allows a family advisor which allows a trusted family advisor, attorney, CPA or the like to have some control and input over the trust administration. This non-fiduciary role is not available in Delaware yet provides a peace-of-mind option for Grantors and beneficiaries of South Dakota trusts.
Special Purpose Entity
Being named as investment advisor, distribution committee or trust protector of a trust is a great honor, but it can also be a pretty big liability. South Dakota solves this issue by allowing a special purpose entity to be formed to protect the people serving in those roles. A special purpose entity is a South Dakota LLC formed to protect these individuals from any personal liability from serving in these roles and hopefully help encourage them to serve. “Special purpose” refers to this entity having the sole legal purpose of directing the administrative trustee. This protection is not available in Delaware leaving those serving in these positions under Delaware law potentially personally liable for actions in these roles.
Community Property Trust
South Dakota is one of only three states that allow people from anywhere in the country to opt-in to treating their trust property as community property under IRC Section 1014(b)(6). This allows property in the trust to have a 100% step-up in basis at the first to die. This can be a powerful planning tool depending on the client’s situation and types of assets providing huge options for savvy tax planning. Delaware does not allow election into community trust laws leaving a huge gap if clients would benefit from such an election.
A common element that runs through these differentiating factors is the efficiency with which trust planning can be accomplished. Although Delaware is a viable option, South Dakota has taken the lead in providing a system with fully engaged and educated judiciary, legislature, attorneys and trust companies that can administer trusts for ultra-high net worth families that demand privacy, flexibility and efficiency.