Creating a trust is an important step in protecting assets and providing for future beneficiaries. A states trust law is just as important. Living in Texas offers an array of benefits and tax advantages. However, when it comes to trust law, Texas falls short in a few categories.
This article will explain those differences. Perhaps you are a Texas resident and the thought of using an outside fiduciary is unappealing. Using an outside fiduciary can offer a risk, but also considerable benefits.
No State Income Tax
South Dakota is known for having great benefits and tax advantages along with Texas. South Dakota does not have an income tax. This allows the trust to grow free of income taxation. Individual income tax accounts for about 48 percent of federal tax income. Most Americans pay taxes twice a year to both their state and to the federal government. According to USA TODAY, South Dakota generates less revenue on a per capita basis than other states. Federal aid accounts for a large portion of their revenue. The federal aid of other states is about 22.5 percent. In South Dakota, it’s about 35.1 percent of revenue. This tax advantage also includes, no capital gains tax, no interest tax, no state LLC or LP taxes, or generation- skipping transfer tax.
South Dakotas dynastic trusts are perpetual. Perpetual is a “trust estate bearing no specific limitation to its duration.” South Dakota offers an unlimited time for a Dynasty trust. Though this is a benefit, it is at risk for future laws being changed. Each generation will be able to avoid federal and state death taxes, state income taxes, and will receive asset protection for every generation. Since the number of affluent individuals increases every year, the dynasty benefits of South Dakota will allow the wealth to grow through multiple generations.
South Dakota has the most powerful statute for protecting beneficiaries from creditors. This statue far exceeds states like Alaska, Delaware and Nevada who have more limited statutes. South Dakota has a statute of limitations for future creditors and preexisting creditors. It is also one of the leading states for LLC/LP asset protection.
South Dakota is the top ranked state for privacy. Most states are required to inform a beneficiary at age 18 if they have a trust. South Dakota is one of the few states that does not have this requirement. Therefore, settlors, grantors, advisors, etc. have the right to change, hide, or eliminate the rights for beneficiaries to obtain information about the trust. South Dakota has legislation to automatically seal in perpetuity if a court is involved in a trust. This seal allows the trusts to be protected if there is a family dispute. Trusts are protected from court modifications when these types of disputes arise.
South Dakota was the first state to create a trust protector statute. Many trust documents list a trust protector in order to safeguard the decisions. Some states will reference a trust protector without having a trust protector statute. South Dakota offers trust protector provision statutes. The trust protector could be responsible for the following:
- Modify or amend the trust instrument to achieve favorable tax status or respond to changes
- Increase or decrease the interests of any beneficiaries to the trust
- Modify the terms of any power of appointment granted by the trust
- Remove and appoint a trustee, a fiduciary provided for in the governing trust instrument, trust advisor, investment committee member, or distribution committee member
- Terminating the trust
For more responsibilities click here.
South Dakota has the #1 ranked decanting statue. Decanting is creating a new trust document and moving the assets. Modifying a trust is sometimes necessary, decanting is an important tool for making these necessary changes. Steve Oshins, one of the top attorneys in the nation, has voted South Dakota as the top decanting state for 6 years in a row.
|State Income Tax||No||No|
|Dynastic Trust||Yes (Perpetual)||RAP|
|Privacy||Yes- Total Privacy Seal Forever||No|
|Directed Trust||Yes||Limited (Sec. 114.0031)**|
|Trust Protector||Yes (Created first in SD)||Limited|
|Decanting Statute||Yes||Yes (Cannot decant trust with ascertainable standard into a discretionary trust or remove mandatory income interest)|
*Texas included a spendthrift statue in 2013 Section 112.035 (d)(2) that summarizes asset protection not applying to a settlor that is the beneficiary of a trust.
** Corporate trustees can interpret how to implement the directed trust statutes of their state. Generally, Texas corporate trustees do not allow external custodians to hold the trust assets or execute investment buys/sells. They also employ greater investment fiduciary oversight for directed trusts than pure directed trust states like NV, DE, or SD.
What to ask your attorney?
An estate attorney will know the best options for your estate plan and your trust. Here are a few questions to ask:
- What are my options for using a trustee?
- Where is your 529 plan?
- Why am I using Texas trust law?
- Do I have to use a trustee in Texas?
- What does Texas rank compared to the others concerning trust law?
- Can I change the governing law of my trust?
- What are my alternative options when creating my trust?
- Will using better trust law help my specific estate plan?
In conclusion, whether you choose to use Texas or South Dakota it is important to understand your options. Using the best trust law provides you with many benefits to your estate and for your legacy. Your attorney and your advisor will assist you in creating these plans.