BY STEVE DINNEN
In the right hands, a trust can be a powerful wealth management tool. In the right state – neighboring South Dakota, in this case – a trust can provide your family or business with even greater ways to control and manage your wealth for now and generations to come.
Lawmakers in South Dakota opened their doors for business in the 1990s when they allowed people living anywhere in the nation to establish a trust in their state. This attracted firms such as Des Moines-based Bankers Trust Co., which soon established BTC Trust Co. in Sioux Falls, to take advantage of some very flexible rules.
- Longevity. At some point – and it may be decades away – trusts wind down. Not necessarily so in South Dakota, where the rule against perpetual trusts doesn’t exist.
- Taxes. There is no state income tax in South Dakota. And capital gains are not taxed there, either. Sterling Trustees of Sioux Falls calculated that after 30 years, a $10 million trust in South Dakota that derived its income from a split of ordinary income (30%) and capital gains (70%) would accumulate an extra $5.3 million over what would be available if it was sited in Iowa.
- Privacy. Trusts in South Dakota are automatically perpetually sealed. Directed dynasty trusts that are designed for perpetual duration in other states would have to obtain a court order to be sealed and that time frame will be limited. All trusts and actions related to the assets or parties to the trust are outside of the public record.
Further, a trust in South Dakota can own a limited liability company, and since records are sealed, the identity of that LLC is private.
“The Swiss banking approach to privacy has drifted [onto] our shore,” said Nate Birkholz, president of BTC Trust. Other distinguishing qualities:
- Direction flexibility. The trust department does not control the asset. Rather, that responsibility lies with a committee selected by the client that handles direction of the asset in trust. And that asset can be virtually anything of value – cars, paintings, apartment buildings, etc.
- Protection. Beneficiaries can still receive income and principal at the discretion of their distribution trust adviser, but creditors face significant hurdles to collection when there is no income interest and no property interest.
Birkholz said that Bankers Trust sees its role in South Dakota as serving as administrator in a three-pronged approach with clients. BTC administers the trust. The client chooses an investment trust adviser. The client chooses a distribution trust adviser, and trustees such as BTC act on the directions from them. (And in South Dakota, trusts do not break a relationship clients may have with their local bank).
Note the word adviser. South Dakota trust administrators don’t dictate to beneficiaries. Rather, they set the ground rules. It’s up to the beneficiaries to prudently manage their asset, for all the generations to come.