So, if you’ve watched my videos before, you know I’m a big proponent of using the laws of a jurisdiction that are most advantageous, whether it’s for privacy, taxation, asset protection, or related issues. I want to make sure that we’re using the laws that best protect my clients or help accomplish what they want to achieve. This could vary for each particular client, but there are a lot of similarities between what clients generally want.
I’m located in Houston, Texas. I work a lot with clients throughout Texas, as well as clients abroad and in other states. One of the things that allows me to do this is that I’m licensed in South Dakota, which is recognized as the best trust jurisdiction in the U.S. You hear me talk about that a lot, but I’ve never really done a side-by-side comparison of different states. Starting with this video, that’s exactly what we’re going to do. We’ll start with a big picture and then, in subsequent videos, we’ll drill down into more specific issues related to why South Dakota is better than other states.
Let’s get into it. I’m going to share my screen with you because I want you to see something. I’m at a website called Bridgeford Trust Company. I’ve worked with Bridgeford Trust Company in the past; they are a South Dakota trust company. They don’t know that I’m showing their website right now, so there’s no endorsement or anything like that—I just think this is a great website, and I’ll show you why.
They have this breakdown of different states’ trust laws—South Dakota, Nevada, Wyoming, Alaska, Delaware—and we’re going to run through this. But before I do that, I want to point out two things that I encourage all of you to look at for yourselves. This chart is built off some citations that they include down here, and we’ll include the link to this webpage. But if you look at this chart, particularly the second citation here, it takes us to an article on WealthManagement.com from Trusts & Estates, which is a leading estate planning publication. It came out in 2022, and it’s called “Which Trust Situs is Best in 2022?” To my knowledge, there hasn’t been as comprehensive or holistic an article that’s done a side-by-side analysis of different trust jurisdictions.
I want to highlight something here real quick. The two authors, Daniel Worthington and Mark Merric, state: “In our view, the four top trust jurisdictions in 2022 are South Dakota, Alaska, Nevada, and Delaware.” Historically, those have been perceived as the best jurisdictions. I feel like Delaware gets a lot of clout for different reasons, which I won’t go into here. But the article mentions that these states are followed by a second tier of jurisdictions: Tennessee, Wyoming, Ohio, and New Hampshire. Wyoming and New Hampshire have had strong trust laws for decades. Tennessee and Ohio are on the forefront when it comes to modernizing trust laws and catching up to other trust jurisdictions. Tennessee has great trust laws; I’ve done planning there before.
The article mentions that they prepared a matrix, which I’ll show you here as well. Two things: First, I think you should check out this article—again, we’ll include the link to it in the about section. The other thing is that they reference this matrix, “Best Situs at a Glance,” on page 58. You can actually click on this; it doesn’t look like it’s linked, but if you click on it, it will take you to a very comprehensive matrix they’ve put together. We won’t go through that now, but I think it’s worth everyone taking a look at if you’re interested in the idea of the best trust laws available and what drives that.
We’re going to start with this first line here: Dynasty Trusts. Let me zoom in a little bit to make this bigger and more helpful to everyone. What is a dynasty trust? Historically, there has been a rule against perpetuities, meaning that a trust has a shelf life—it can only exist for a certain amount of time. Usually, it’s 21 years after a life in being, so after someone specified in the trust document passes away, the assets have to be removed from the trust 21 years later. At that point, you’re subjecting those assets to wealth transfer taxes like estate tax or generation-skipping tax. But back in the 1980s, some states—South Dakota being the first—did away with that rule against perpetuities, allowing them to have what’s called a dynasty trust, meaning the trust can live in perpetuity, or forever.
Not all states have this. Even if a state says they have a dynasty trust, you have to qualify that and understand what it means. You may see the rankings here: South Dakota is number one, and again, the citations are listed below. I will make other videos that go through this in more detail. Nevada is second, Wyoming is fifth, Alaska is fourth, and Delaware is seventh. South Dakota has a true dynasty trust, meaning the trust can live in perpetuity. Nevada’s trust can only last 365 years. While that may seem like a long time—multiple generations—if you’re shopping for the best jurisdiction, why sell yourself short? Wyoming has a thousand-year dynasty trust. Alaska has a hybrid: a perpetual dynasty trust, but also a thousand-year limit if you exercise a power of appointment. Delaware also has a hybrid situation: a perpetual dynasty trust for personal property, but only a 100-year limit for real estate. So, anything that’s not real estate can exist in perpetuity inside that trust, while real estate is limited to 100 years. That’s something to consider.
You’ll notice that many of these jurisdictions have similarities. Most of them don’t have state income taxation, or they only tax residents at their state community property trust. South Dakota is unique in that it has this, as does Alaska. Another huge aspect that drives these jurisdictions as leading jurisdictions is domestic asset protection laws. Most states allow you to set up an irrevocable trust for your own benefit and move your assets into it, protecting them from lawsuits, creditors, or divorcing spouses. Only a handful of states allow this. South Dakota and Nevada are recognized as number one and number two, and they are very closely related with only a small nuance, which I’ll discuss in a different video. Domestic asset protection trust planning is one of the biggest things people are looking at. The other states have these laws too, but you’ll notice there’s a two-year statute of limitations for South Dakota and Nevada. Other states have a four-year statute of limitations, while Ohio has the shortest at a year and a half.
We have a few other things here to look at, like trust protectors—every state has that, and I’ll make a video about it. Directed trusts are where you bifurcate or trifurcate the various trustee responsibilities. Historically, a trustee, whether an individual or a trust company, had all the responsibilities, but now you can delegate specific responsibilities to someone with the background and capability to manage them. Decanting statutes are also important because they allow for flexibility in what has historically been an irrevocable trust. Decanting statutes let you move assets from an existing irrevocable trust to another irrevocable trust. There are limitations based on the state. South Dakota has the most flexible decanting statutes, which means that if a trust is no longer working for you, you can move the assets to a new trust under certain circumstances.
Lastly, trust privacy laws are another important factor. South Dakota is unique in that it offers total privacy, sealing the details of a trust forever. Nevada, Wyoming, and Alaska do not have this level of privacy. Delaware does have a privacy seal, but it’s only for three years, subject to a judge’s discretion.
South Dakota also has what’s called “quiet trust” laws, which means that a trust can be kept quiet from beneficiaries. If you’re setting up a trust for your children and don’t want them to know about it, you can include that in the trust agreement. This is unique to South Dakota; most states require beneficiaries to have access to trust information at a certain age, typically 18, 21, or 25.
That’s a quick overview of why South Dakota is the best jurisdiction. Other trust companies in Nevada, Delaware, and Wyoming have similar charts, but I think they overlook some aspects. The reason I used this particular chart is that it links to the WealthManagement.com Trusts & Estates publication, which is a great article diving into more issues than I’ve covered here.