South Dakota trust law vs. Colorado trust law

When creating a trust, often times, clients don’t fully understand all their options. All state trust law is not created equal. For clients, knowing the difference between their states benefits and another is not usually common. Most attorneys have heard of top jurisdictions like South Dakota for administering trusts. However, they might not know the different advantages it may have over their state. South Dakota trust law vs. Colorado trust law is one of the most common comparisons clients search for. Using an outside trust situs in order to administer trust can offer value for both the grantor and beneficiaries. Below you will see the comparison of South Dakota trust law vs. Colorado trust law.  

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After reading this, you will have necessary knowledge to make the best decision to use South Dakota trust law vs. Colorado trust law for your trust. The following are the top reasons as to why you should consider using South Dakota trust law vs. Colorado trust law:

No state income tax - There’s no state income tax, no capital gains tax, no dividends, and no interest tax.

Dynastic Trusts - A wise way to avoid multiple hits of taxation is by using South Dakota’s dynastic trust benefits to grow your wealth for multiple generations.

Asset Protection – South Dakota has enacted legislation which prohibits judicial foreclosure and creditor attachment on beneficial interests in trusts, powers of appointment held by beneficiaries, and reserved powers by a beneficiary. Additionally, a power of appointment in a trust is specifically excluded as a property interest. South Dakota was the first state with a discretionary trust statue for asset protection.

Directed Trusts - South Dakota directed trusts benefit from passive laws that allow trust advisors to delegate the management of assets held in trust to the expertise of third parties.

Privacy Rules - South Dakota’s Quiet Trust benefits mean the trustor can restrict and even conceal the existence and information about a trust from a trustee.

Trust Protector- 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.

Decanting - South Dakota has the #1 ranked decanting statute. 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

Below is a comparison chart for South Dakota vs. Colorado. 

(1) Dynastic Trust (RAP): CO has the rule against perpetuities.

• Colorado Revised Statutes (CRS) 15-11-1102.5: 
  • Interests created after 5/31/01 must vest within 1,000 years to be valid (15-11-1102.5(1)).
  • Interests created between 5/31/91-5/30/01 must vest within 21 years after the death of a life in being at the time the interest was created (i.e., class RAP rule) or it must vest within 90 years (15-11-1102.5(2)).
    
    

(2)  Asset Protection: No creditor protection for revocable trusts; some creditor protection for irrevocable trusts

• Creditor protection generally exists with a spendthrift provision (CRS 15-5-501, 502), but exceptions exist (CRS 15-5-503). A discretionary distribution standard provides some creditor protection for beneficiaries, regardless of a spendthrift provision (CRS 15-5-504). In addition, the following applies regardless of the existence of a spendthrift provision (CRS 15-5-505):
  • Revocable Trusts: No creditor protection for settlor
  • Irrevocable Trusts: A creditor can reach the max amount that can be distributed to or for the settlor’s benefit.

(3) Privacy: Probate records are public, meaning any testamentary trust would become public record. Note that there are statutes regarding abandoned original estate planning documents (15-23-101 – 122). Colorado mandates that abandoned original estate planning documents shall be given to a state custodian who will make a database of electronic copies. The index of grantor names of the database is public record, but the document itself is not public record (15-23-117).

(4) Directed Trust: Allowed under the Colorado Uniform Directed Trust Act (CRS 15-16-801 – 818). Specifically, the trust agreement may grant a power of direction to a “trust director” (15-16-806). A trust director is “a person that is granted a power of direction by the terms of a trust to the extent the power is exercisable while the person is not serving as a trustee. The person is a trust director whether or Not implemented or favored by Corporate Trustees.

(5) Trust Protector: The CRS is silent as to the trust protector role. However, 15-5-105 sets forth rules that cannot be overridden by a trust instrument. This does not prohibit the use of a trust protector. Therefore, as long as (1) a trust agreement authorizes a trust protector, and (2) the trust protector cannot exercise any restricted powers, the trust protector should be allowed.

(6) Decanting Statute: Yes, but allowed under the Colorado Uniform Trust Decanting Act (CRS 15-16-901 – 930), provided decanting is not prohibited under the trust instrument (15-16-903; 15-16-915).

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