Best State for Setting Up a Trust

Where is the Best State for Your Trust? Let's Take a Look:

October 30, 2018

Joe TwidwellBy Joe Twidwell
Senior Vice President & Trust Officer 

Are you thinking about creating a trust? How and where you set up your trust plays a significant role in its success. When placing a trust, it’s important to consider the location of where you establish it, especially since the 50 states in the U.S. offer 50 different sets of opportunities and challenges.

In fact the location of your trust, otherwise known as a “situs,” is often as important as its amount and purpose.

How a Trust Works:

Simply put, a trust is a financial agreement between three parties:

  • The person creating the trust called the grantor.
  • The person managing the trust called the trustee.
  • The person who receives the trust called the beneficiary.

A trust has multiple uses, but is primarily a way for someone to manage their estate and leave money to their children, grandchildren, other family members or people they want to inherit their financial legacy.

What is a Trust Situs?

A situs is the legal location of financial property. Its location determines how it is governed, taxed and maintained. Some states, like South Dakota for example, are friendlier for situses because they have created a favorable trust environment that takes taxes and other law considerations into account for long-term financial planning.

What is the Best State For Setting Up a Trust?

Often, people choose to set up a trust in the state in which they reside, but there are many reasons to establish a trust elsewhere. Whether you're deciding where to build your trust, or moving your trust from one state to another, look for favorable trust environments. Some factors to consider include dynasty trust laws, asset protection, decanting regulations and taxes:

STATE-BY-STATE COMPARISON FOR BEST TRUST LAWS


INCOME TAX

DYNASTY LAWS

REQUIRED
TO NOTIFY
BENEFICIARY?

DOMESTIC ASSET PROTECTION RANKING 1

TRUST DECANTING RANKING 2

TRUST SITUS RANKING 3

South Dakota South Dakota No Income Tax  Perpetual No #2 #1 TIER 1
NevadaNevada No Income Tax  365 Years No #1 #2 TIER 1
TennesseeTennessee  3.0% on Interest & Dividends (Residents only) 360 Years No #3 #3 TIER 2
Alaska
Alaska
No Income Tax Perpetual Yes #7 #7 TIER 1
WyomingWyoming No Income Tax 1,000 Years No #10 #10 TIER 2
Rhode Island Rhode Island 5.99% on Income over $7,800 (Residents Only) Perpetual Yes #9 #20 UNRANKED
OhioOhio 4.997% on Income Over $213,350 (Residents only) Perpetual Yes #4 #6 TIER 2
Delaware
Delaware
6.60% on Income over $60,000 (Residents only) Perpetual Yes #7 #5 TIER 1
Illinois
Illinois
4.95% (Residents only) Perpetual Yes Not Allowed #7 TIER 3
MissouriMissouri 6.0% on Income over $9,072 (Residents only) Perpetual  No, Except for Beneficiaries of Second Trust #6  #10 UNRANKED
New Hampshire New Hampshire No Income Tax Perpetual No, Except for Charitable Trusts #11 #4 TIER 2
Florida
Florida
No Income Tax 360 Years Yes Not Allowed #26 TIER 3

CHART LAST UPDATED DEC. 2018
1. Steve Oshins, 2018  •  2. Steve Oshins, 2018  •  3. Trust & Estate Magazine, 2018

 

Dynasty Trust Laws

A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes as long as assets remain in the trust. In most states, there are limits to how long a trust can be passed down. However, if you are establishing a trust for multiple generations to come, you will want to consider the favorability of a state’s dynasty trust laws. South Dakota has the most favorable dynasty trust laws, with no restrictions, and ranks No. 1 according to the annual Dynasty Trust State Rankings released by Steve Oshins.

Decanting a Trust

Decanting a trust is the process of taking the original trust, and modifying the provisions by moving the funds into a new trust. If you would like to make amendments to the trust it can be done through decanting. However, not all states allow decanting, so be sure to factor in a state’s decanting regulations when making your choice. South Dakota is also ranked No. 1 for the most favorable trust decanting laws.

What is a Quiet Trust and Why Does it Matter?

Many people set up a trust, but prefer to keep it under wraps, for a variety of reasons. Some grantors may want their beneficiaries to develop a strong work ethic or to be unaware of the trust they will eventually inherit. Quiet trust laws vary from state to state, with some states requiring the trust to be disclosed to beneficiaries. In South Dakota, however, the provisions of your trust may override the general duty to disclose to beneficiaries.

Asset Protection Laws

Asset protection is the way to keep your trust safe from extraordinary life situations like divorce or bankruptcy. States with strong asset protection laws provide the best way to keep your trusts out of the hands of creditors. In South Dakota, asset protection laws are ranked among the most stringent in the nation, while in other states your assets may not be protected from situations like divorce or child support.

State Taxation of Trusts

Taxation of trusts varies widely from state to state, so you want to find the most favorable tax laws for your particular type of trust. In some states, income taxes don't apply to trusts, in others it depends on the amount in the trust or the grantor’s residency. South Dakota does not tax trusts in any circumstance, making it an ideal location, or situs, for your trust.

Why You Should Place Your Trust (Situs) in South Dakota

When it comes to the ideal home for your trust, it pays (often substantially) to compare laws, opportunities, and restrictions in every state — not just the one in which you reside. In fact, as many people with trusts have discovered, one of the smartest things you can do for your wealth management goals is to set up a trust situs in South Dakota.

Here are a few additional benefits of the South Dakota situs:

  • Virtual representation statutes. South Dakota allows for virtual representation, which eliminates the need for an appointment of a trustee to represent the interests of unknown or not-yet-known beneficiaries.
  • No-contest clauses. South Dakota reduces the likelihood of litigation by allowing no-contest clauses in trust documents. Not only does this reduce the number of legal disputes, but it also strengthens the soundness of the trust’s mission.
  • Decanting provisions. South Dakota’s codified decanting provisions give a trustee the power to transfer trust assets from one trust to another separately governed trust. As long as the decanting falls under one of the GST safe harbors, there should not be a change in GST exempt status or a GST tax due to this transfer of assets.
  • Favorable tax treatment. South Dakota has no state income tax on individuals or trusts. Keep in mind, however, that most other states do — and if the state in which you live has income taxes, you will still be taxed on the income you receive from your South Dakota trust.
  • Several types of trusts are available. South Dakota allows specialized trusts, perpetual, trusts, and domestic asset protection trusts.
  • South Dakota also allows the formation of private family trust companies and has one of the lowest thresholds for entry among the perpetual jurisdictions — just $200,000 in initial capital.

No bank knows the ins and outs of the South Dakota situs like the wealth management professionals at Security National Bank. Our experience with attorneys and CPAs representing clients from all over the country has made us particularly equipped to handle every size of trust and situation.

With more than 130 years of experience and service, we have consistently provided sound financial advice to generations of families in need of trust services. When the time comes for you to discuss your financial legacy, our team is here to help walk you through all of South Dakota’s situs benefits and opportunities.

About the Author

Joe Twidwell, J.D.

Joe Twidwell is the Senior Vice President and Trust Officer in Security National Bank's Wealth Management Division. A licensed attorney with the Nebraska and South Dakota Bar Associations, Joe holds his Juris Doctorate from the Creighton University School of Law; and has more than 35 years of experience in trust administration, estate planning, employee benefit design and administration.