In recent decades, South Dakota has become one of the most popular trust jurisdictions. From 2010 to 2020, the assets South Dakota trust companies held increased by ~6x from $57 billion to $355 billion! People from all over the country (and all over the world) are setting up irrevocable trusts in this Midwestern state. It’s no wonder why. South Dakota’s tax and trust laws are extremely attractive. This article explains why so many people set up South Dakota trusts — and how you can, too.

Eight Reasons to Create a South Dakota Trust

1. No State Income Tax: South Dakota does not have a state income tax. That means that South Dakota resident trusts that are treated as separate taxpayers — so-called “Non-Grantor Trusts” — are only subject to federal income tax on any income that is not sourced to a particular state. Administering such a trust in South Dakota can result in significant tax savings over time compared to administering a trust in a state that does tax trust income. For example, dividend income or interest income is generally not sourced to any one state, so a South Dakota Non-Grantor Trust would not be subject to state income tax on such income. On the other hand, rental income from a New York property would be subject to New York income tax, even if earned by a South Dakota resident trust. Note that if a South Dakota trust is set up as a “grantor trust,” it is ignored for income-tax purposes, and its income will be treated as having been earned by the trust’s grantor and therefore will be taxed based on the grantor’s state of residence, not the trust’s governing law.
2. Robust Asset Protection: South Dakota’s trust laws provide very strong creditor protection compared to states like California or New York. Notably, the look-back period for creditors — which is the time that creditors have to come after trust assets that are somehow implicated in a creditor’s claim — is only two years. That’s one of the shortest creditor look-back periods in the country. Trusts set up under South Dakota law are largely safe from lawsuits, creditors, and other claims.
3. Dynasty Trusts: Historically, trusts were only able to last for a limited amount of time due to something called the “Rule Against Perpetuities.” In recent decades, a number of states have abolished the Rule Against Perpetuities, though it remains, at least in some form, in most states. South Dakota abolished its Rule Against Perpetuities decades ago. As a result, trusts created under South Dakota law can last forever without any required distributions. Dynasty trusts can enable your heirs to avoid millions of dollars of estate tax!
4. Enhanced Privacy: One fear a lot of trust grantors have is privacy. South Dakota has arguably the strongest trust privacy laws in the country. Some states require either public disclosure of trust provisions in certain situations or the disclosure of trust information to beneficiaries. South Dakota’s trust laws allow trustees to control how much information beneficiaries receive. Moreover, trust documents do not need to be filed publicly, and any modifications can be made without court involvement or public disclosure.
5. Flexible Trust Laws: South Dakota offers considerable flexibility in trust administration. Its decanting statute allows trusts to be updated or reformed more easily than in many other states to address changing circumstances or law. South Dakota law also permits directed trusts, allowing the separation of trustee duties among different parties. This can provide more control and specialized management of trust assets.
6. Low Premium Taxes: Every state taxes life insurance premiums to some extent. In Nevada, for example, the premium tax is 3.50%. So on a $1 million premium, the Nevada tax would be $35,000. California’s premium tax is 2.33%. South Dakota has one of the lowest premium taxes on life insurance policies in the nation: 0.08%. This can be advantageous for trusts that are making significant life insurance premium payments. Private Placement Life Insurance policies, for example, often have six-figure or even seven-figure annual premium payments. The difference in premium taxes between a jurisdiction like Nevada and a jurisdiction like South Dakota can easily reach into the tens of thousands of dollars.
7. Electronic Document Execution. In 2023, South Dakota became one of the first states to explicitly recognize the validity of electronically signed trust agreements and ancillary documents. By totally eliminating the need to sign paper copies of documents, South Dakota has made the execution and administration of trusts more seamless than ever before.
8. Responsive State Government: South Dakota’s legislature regularly updates trust laws to maintain the state’s competitive edge. The same can’t be said for many other states, including many states that are currently considered top trust jurisdictions. The state government’s commitment to maintaining South Dakota’s status as a top trust jurisdiction through ongoing legislative updates further enhances its appeal for long-term trust planning.

While other states like Nevada, Delaware, and Tennessee also offer trust-friendly environments, South Dakota’s combination of tax benefits, asset protection, privacy, and flexible trust laws make it a particularly attractive jurisdiction for irrevocable trusts.

How Can You Set up a South Dakota Trust?

In order for a trust to be located in South Dakota, it needs some sort of nexus to the state. The most common way to achieve that nexus is by naming a South Dakota trustee to administer the trust. The South Dakota trustee can be an individual, but most often it’s a bank or trust company that’s based in the state. In fact, setting up a South Dakota trust has never been easier. You can set one up online through Valur’s website.

Valur offers four varieties of South Dakota irrevocable trusts: Intentionally Defective Grantor Trusts (”IDGTs”), Non-Grantor Trusts, Irrevocable Life Insurance Trusts (”ILITs”), and Spousal Lifetime Access Trusts (”SLATs”). Each type of trust has pro’s and con’s, but all offer substantial asset-protection and tax advantages. Read the linked articles for more details on each trust type.

About Valur

We’ve built a platform to give everyone access to the tax and wealth-building tools typically reserved for wealthy individuals with a team of accountants and lawyers. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures. With Valur, you can build your wealth more efficiently at less than half the cost of competitors. 

From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!