A BELLWETHER OF MODERN TRUST CONCEPTS: A HISTORICAL REVIEW OF SOUTH DAKOTA'S POWERFUL TRUST LAWS.
A. RULE AGAINST PERPETUITIES
This article begins with South Dakota's claim to fame, its 1983 Rule Against Perpetuities ("RAP") statute. This statute codified the 1979 case of Estate of Murphy v. Commissioner (6) in which the IRS acquiesced to the method utilized to abolish the RAP. The Murphy case approach to abolishing the RAP shifted the perpetuities inquiry from remoteness of vesting to suspension of the power to alienate. (7) For example, if the trustee has an explicit or implied power to sell, the trust jumps outside the rule of suspension of alienation, which limits the duration of the trust, thus allowing for an unlimited duration trust. Generally, states that have embraced Murphy have also abrogated or abolished the RAP, which addresses the timing issue. As a result, these states address both the timing and the vesting issues associated with doing away with the RAP as required by Murphy, which is key according to most generation-skipping transfer tax ("GST tax") and RAP experts. (8)
Murphy was relied upon by both South Dakota and Wisconsin in their respective state enactments of RAP laws prior to the imposition of the modern GST tax in 1986. (9) Idaho also enacted a pre-1986 RAP statute that followed the Murphy case approach to abolishing the RAP. (10) Consequently, these state statutes cannot be construed as an attempt to circumvent the GST tax, thus making them the only three bellwether states.
Delaware enacted a Murphy case type RAP statute in 1995 in response to South Dakota and the business South Dakota was generating, as delineated in Delaware's legislative history. (11) Alaska then followed suit in 1997 with a RAP statute that partially relied on Murphy; (12) Alaska further amended its statutes in 2000 to advance, but not completely align with Murphy. (13) Missouri, New Hampshire, New Jersey, and North Carolina have also relied on Murphy when designing RAP statutes, but many of these states have other trust, income tax, or asset protection limitations. (14) Many states do not follow the Murphy approach, which may or may not present a significant risk to both self-settled and third party dynasty trusts. (15) The aforementioned states are term-of-years states, hybrid states, and opt-out states. (16)
B. TRUST INCOME TAXATION
South Dakota was the only pre-1986 dynasty trust state without an income tax on trusts. Both Idaho and Wisconsin imposed state income taxes on trusts. Wisconsin has since done away with its trust income tax for non-residents. (17) Many other post-1986 dynasty states do not have state income taxes on trusts. (18) A few states have tweaked their dividends and interest taxes to further accommodate their dynasty trust statutes. (19) Several other non-dynasty trust states with high taxes have either enacted laws or are attempting, through the courts, to prevent or make it difficult for clients to establish or change the situs of a trust to a no income tax dynasty trust state. (20)
C. CONSTRUCTIVE ADDITION
It is important to note that once the GST tax exemption has been allocated to a trust, any material change to the nature of the beneficial interest might trigger a constructive addition, thereby eroding the GST tax inclusion ratio. As previously mentioned, several of the dynasty jurisdictions have different RAP statutes or perpetuities rules. Caution must be exercised when changing the situs from one dynasty jurisdiction to another (i.e. South Dakota). A change of situs should be able to take place between Murphy states without constructive addition issues. However, changing situs from a non-Murphy state to a Murphy state could pose problems. (21) Consequently, with any change of trust situs coupled with a reformation, modification, or decanting, the existing RAP statute will usually be retained.
D. CONSTITUTIONALITY OF PERPETUAL TRUSTS
In a Vanderbilt Law Review article titled Unconstitutional Perpetual Trusts, attorney Steven Horowitz and Harvard Professor Robert H. Sitkoff raised interesting questions about the constitutionality of perpetual trusts in certain states with constitutional prohibitions of "perpetuities;" an issue not present in South Dakota. (22) This raises important questions about possible conflict-of-law issues when a trust settlor's resident state has a strong public policy against perpetual trusts. Eleven states have had constitutional bans on perpetuities. Of those eleven, California and Florida are the only two states to later repeal those bans, thereby leaving nine states that currently have them. (23)
E. MARQUETTE CASE (CITIBANK--SOUTH DAKOTA)
Prior to its 1983 Murphy RAP statute, South Dakota's rise to the top indirectly began with the famous United States Supreme Court case, Marquette National Bank v. First Omaha Services Corporation. (24) Interest rates in 1980 were generally around 20%, while the usury limits generally varied between 10 and 15%. (25) Consequently, usury caps were below actual interest rates, thus posing a profit dilemma for all the credit card and lending banks. The Supreme Court held in Marquette that national banks could locate in a state and apply the state's credit laws to card users nationwide, regardless of the laws in the other states. (26) Previously, a bank in one state lending money to a client in another state had to follow the usury laws of the client's resident state.
Consequently, following Marquette, the interest rate was applied based upon the locality where the credit decision was made (the lex loci rule), which revolutionized the credit card industry. Citibank began working with then Governor William Janklow and the South Dakota legislature after New York, where Citibank was headquartered, would not change their laws for the bank to benefit from the Marquette decision. (27) When Citibank turned to South Dakota, two emergency bills passed very quickly: one abolishing South Dakota's usury law and the second allowing out-of-state bank holding companies to create South Dakota subsidiaries. (28) This resulted in Citibank moving its credit card operation and approximately 3,000 employees to South Dakota, as well as the eventual establishment of Citicorp Trust South Dakota in 1995, which became a launching pad for the South Dakota trust business. (29) Thereafter, Delaware passed their Dynasty statute in 1995 in response to South Dakota's success marketing its South Dakota Dynasty Trust statute. (30)
II. MODERN INNOVATIONS
Though the Rule Against Perpetuities was the watershed moment that put into motion South Dakota's trust industry, the decades that followed saw the creation and adoption of the innovative modern trust laws that would ultimately establish South Dakota as one of the top trust jurisdictions. (31) Each new statute introduced and enacted in South Dakota brought about significant changes to the trust, asset protection, and tax laws of the state, culminating in an unparalleled landscape for families both domestic and international, to implement customized multi-generational planning with a flexibility and control not seen in the United States before.
A. THE DIRECTED TRUST
After abolishing the Rule Against Perpetuities, one of the crucial pieces of modern trust law that South Dakota codified was the directed trust. Directed trusts provide a family with maximum flexibility and control regarding a trust's asset allocation, diversification, investment management, and distributions. (32) Nearly all states have "delegated" trust statutes, (33) but only a few select states, such as South Dakota, have "directed" trust statutes. In fact, South Dakota has one of the oldest and highest rated directed trust statutes in the country. (34) A directed trust allows individuals who establish a trust with an administrative trustee in the directed trust state, such as South Dakota, to appoint an investment advisor or committee. The advisor or committee can direct the administrative trustee on how the trust will be invested and to hire an outside investment advisor or manager to manage the trust's investments. Multiple committee members or advisors may be chosen based upon different asset classes or diversification. This allows a family to utilize a Yale or Harvard endowment type asset allocation, which they might not otherwise be able to do with a delegated trust as a result of laws, risks, time, and costs. (35) Alternatively, a family may hold a large position in a public or private security without the need to diversify with a directed trust. (36)
Any type of trust can be established as a directed trust, including both revocable and irrevocable trusts. The trust instrument vests control over investment discretion with an outside advisor and exonerates the administrative trustee. (37) Consequently, a directed trust combines flexibility and control, as well as the favorable trust, asset protection, and tax laws of the directed trust state, like South Dakota, with the skills of a client's own investment advisors. (38)
Additionally, a distribution committee may be established to determine when trust distributions should be made and directs the administrative trustee accordingly. Family members can serve on these distribution committees and determine all distributions of income and principal for health, education, maintenance, and support ("HEMS"). Any additional distributions would be tax sensitive and require an independent person (e.g., South Dakota administrative trustee, certified public accountant, attorney, or a combination thereof). (39) South Dakota is one of only a few directed trust states with statutes allowing the administrative trustee to accept "direction" regarding distributions, as well as investments. (40) The administrative trustee can also typically be removed at any time and, alternatively, if desired, the administrative trustee can step into any of the committee functions. Generally, all directed trust fiduciaries are acting pursuant to a gross negligence/willful misconduct standard by statute and/or by drafting such into the trust. (41)
B. TRUST PROTECTORS
Although previously only used in offshore trusts, the use of trust protectors domestically began gaining popularity with the passage of the first domestic trust protector statute in South Dakota in 1997. (42) Several states now have trust protector statutes. (43) The typical purpose of a trust protector is to provide flexibility to an irrevocable trust. A trust protector is generally an individual (though a committee of individuals or an entity may serve) with specified powers over the trust. The trust protector is not a trustee and never holds or administers trust property. The exact role of the trust protector and the ability of the trust protector to direct a trustee or fiduciary will vary depending on the specific terms of the trust and state statutes. (44)
The trust protector is also being utilized more and more with domestic trusts to supplement the investment and distribution committees of many directed trusts. Advisors are also drafting the trust protector functions into the trust documents even in states without specific statutes; however, this may not be as strong as drafting trust protector functions pursuant to a specific statute. Other states reference the trust protector function by statute, but do not delineate powers. Many of the top-rated trust protector statutes also list the powers and have flexibility for the powers to either be a fiduciary or personal, as is the case in South Dakota. (45) The South Dakota statute defaults to personal powers unless otherwise stated in the trust document. If a trust protector action is fiduciary, then that power will override the personal default found in the statute. (46) South Dakota also provides the trust protector standing to prosecute a lawsuit without requiring the trust protector to join the trustee of the trust; for example, to remove the current trustee. (47)
Some of the common powers given to a trust protector are as follows: the power to remove or to replace trustees; the power to veto or direct trust distributions; the power to add or remove beneficiaries; the power to change situs and the governing law of the trust; the power to veto or direct investment decisions; the right to consent to exercise power of appointment; the power to amend the trust as to the administrative and dispositive provisions; the power to approve trustee accounts; the power to add a grantor as a beneficiary from a class of beneficiaries; and the power to terminate the trust. (48)
C. SPECIAL PURPOSE ENTITIES
Special Purpose Entities ("SPE") have been gaining popularity for quite some time, however, only a few states currently allow for these types of entities. South Dakota was the first state, and is currently one of only two states that recognize these entities by statute. (49) SPEs are South Dakota limited liability companies ("LLC") or some other form of corporation that houses the trust protector, as well as the investment and distribution committees or advisors of a South Dakota directed trust. The sole purpose of the SPE is to direct the administrative trustee (a qualified South Dakota trustee) as to the trust investments, distributions, and trust protector functions of a South Dakota directed trust. The SPE is not a Private Family Trust Company, (50) although one SPE can work with an entire family's trusts so long as it is working with a qualified South Dakota trustee of a South Dakota directed trust. (51)
The SPE provides for governance and trustee succession, as well as a liability umbrella over the individuals filling the roles of Trust Protector, Investment Committee, or Distribution Committee. These individuals are, in turn, employed by the South Dakota Special Purpose Entity LLC as agents or employees rather than serving as individual trustees or fiduciaries from their resident states. This may be beneficial from both a tax and asset protection standpoint. (52)
The SPE typically has specific by-laws and allows for additional members to be added or removed so that the entity can continue along with the trust. These entities have to be properly structured so as to avoid estate tax inclusion issues. Additionally, many of the SPE operating agreements are drafted so that their Board of Managers meetings and decisions regarding trust investments and distributions cannot take place within the client's resident state. Usually, these meetings will be held in a state outside of the family's resident state when the family is traveling to another state on vacation or for business, which may also be very useful for tax and asset protection purposes. (53)
Furthermore, Delaware and Wyoming allow for trust protector companies ("TPC") that are similar, but not recognized by statute, while New Hampshire, by statute, allows for a similar vehicle referred to as the Qualified Trust Advisor ("QTA"). (54) A South Dakota trustee of a South Dakota directed trust may generally work with a New Hampshire, Wyoming, or Delaware TPC/QTA. The South Dakota SPE statute, on the other hand, requires that the South Dakota SPE only work with a qualified South Dakota trustee of a South Dakota Trust. Such a requirement, in addition to the statutory requirement that the SPE register with the South Dakota Division of Banking, provides additional nexus to South Dakota. (55)
D. PRIVATE FAMILY TRUST COMPANY
The Private Family Trust Company ("PFTC") laws in South Dakota were enacted in 1995, and since then, have evolved so that South Dakota has become the top rated regulated PFTC jurisdiction in the U.S. This can be attributed mainly to South Dakota's economy, Division of Banking, governors, state legislatures, as well as its favorable trust, asset protection, tax, and PFTC laws. (56)
Generally, a PFTC is an LLC or corporate entity (57) that is one-hundred percent owned by the family or a trust, and is qualified to do business in the PFTC jurisdiction, after acceptance by the jurisdiction's Division of Banking ("DOB") and receipt of a charter. The PFTC then generally works with the family office, typically located in the client's resident jurisdiction, via one or more service agreements to provide related services such as investment advisory and management, asset allocation, as well as illiquid asset, real estate and private equity management. (58)
PFTCs may be either regulated or unregulated. South Dakota only offers regulated PFTCs. The regulated PFTC generally receives a charter, and the unregulated PFTC usually receives a license. The question of whether to establish a regulated or an unregulated PFTC is an important one. Many families select the regulated PFTC option to obtain the Securities and Exchange Commission ("SEC") registration exemption, as well as to establish the strongest case to prevent the ability to "pierce the corporate veil." The formalities associated with the regulated PFTC, such as a charter, capital requirements, (59) state audits, policy and procedures manuals and compliance all help to ensure that the PFTC is a properly functioning entity and trustee. Many unregulated PFTCs also follow many of the formalities of the regulated PFTCs to strengthen their position as viable trustee alternatives. Many other unregulated PFTCs simply have the corporate agent hold their license in a drawer without many, if any, formalities, which could prove to be a future problem. (60) Additionally, South Dakota has the lowest regulated PFTC capital requirements ($200,000) in the U.S., as well as low set-up, operational and maintenance costs, which, when combined with the top trust, asset protection and tax laws in the U.S., result in many families from around the world establishing their regulated PFTC in South Dakota. (61) In addition, families may utilize a regulated PFTC in South Dakota in combination with a service office or foreign family trust company in another jurisdiction such as one with PFTC legislation that has been newly enacted and not yet completely matured (e.g., Florida). (62)
Further, beyond just the ease of creating and maintaining a South Dakota PFTC, there are several other compelling reasons to establish a regulated PFTC. (63) First, as previously discussed, there is an exemption from Security and Exchange Commission ("SEC") registration, since the PFTC is audited by banking division within the PFTC state. (64) This provides a family with privacy versus having key family information public on the SEC website. This also allows for the ability to establish SEC-exempt business trusts and common trusts funds as an alternative to collective investment vehicles/partnerships, which are generally required to register with the SEC and limited to ninety-nine investors and other restrictions.
The PFTC also allows for liability protection. The family acts as trustee with a LLC/PFTC entity owned by family or a trust with directors' and officers' insurance protection versus family members serving individually as trustees and/or fiduciaries with personal liability. The PFTC may also allow for planning opportunities for deducting investment fees in light of the holding in Knight v. Commissioner (65) and IRS's Treasury Regulation section 1.67-4(d). (66) The final Treasury Regulation requires that investment fees be separated out from the overall trustee fee and subject to the two percent adjusted gross income limitation. Planning opportunities with PFTCs may still provide ways to possibly deduct those investment fees by utilizing a combination of a C-corporation and an investment partnership.
PFTCs also provide for the following: a resolution of successor trustee issues; convenience and accessibility; efficiency in that they control overhead and provide economies of scale; improved family governance with LLC/PFTC structure; enhanced ability to properly administer and operate illiquid family assets in trust (e.g., LLCs, FLPs, real estate, oil and gas); assets with possible environmental issues; assets requiring registration as gambling agent (e.g., certain hotels, etc.); the ability to allow for holding large concentrations of stock both public and/or private; and allow for extensive flexibility with asset allocations; and privacy.
Additionally, the IRS ruled if properly established, the PFTC will not be subject to estate tax inclusion. (67) PFTCs allow for better informed trust distribution and investment decisions. They enable families to efficiently work with their own family office and all outside product advisors (i.e., investment, insurance, etc.) of their choice.
A PFTC is also the only form a family office can take to provide fiduciary services directly to family members rather than just supporting the family's individual trustees or unaffiliated corporate fiduciaries. Additionally, a South Dakota PFTC has all the powers of a South Dakota money lending company and consequently all of South Dakota's great lending statutes.
Lastly, many multi-family offices ("MFOs"), Registered Investment Advisors ("RIAs"), law firms, certified public accountant ("CPA") firms, banks, insurance firms and IRA companies, are also establishing South Dakota PTCs for commercial purposes. South Dakota has always allowed both family and commercial PTCs since its statute was codified in 1995, but it modified its PTC statute in 2010 to accommodate family and commercial PTCs separately. Family PTCs are audited every thirty-six months and commercial PTCs every eighteen months. (68)
E. PREMIUM TAX (69)
State premium taxes are paid on all insurance premiums in the U.S. These premium taxes vary dramatically among the states. Between 2001 and 2016, South Dakota had the lowest premium tax in the U.S. (70) In 2016, South Dakota continued to have one of the lowest state premium taxes (i.e. 8/100ths of 1% or eight basis points) in the United States for premium payments in excess of $100,000 for policies owned by trusts, and the lowest for polices owned by LLCs. (71) The majority of the other states average between 1.75% to 2.5%. (72) However, Alaska recently lowered their premium tax to eight basis points to match South Dakota, and Delaware reduced their premium tax to zero basis points for trust owned policies only (not LLC owned); both for premiums over $100,000. (73)
Competitive state premium taxes and modern domestic trust laws, as well as improved domestic regulatory costs and state consumer laws for insurance policies have resulted in much larger life insurance contracts being issued onshore in South Dakota versus the traditional route offshore. (74) Most domestic state premium tax planning has involved private placement life insurance ("PPLI"), versus the more traditional whole and universal life insurance. (75)
State premium taxes are imposed on premiums paid for the life insurance by the state in which the applicant for the insurance policy is resident, domiciled, or sitused. However, the insured's resident state will not generally levy a premium tax on the premium paid for the life insurance policy purchased by a trust or a LLC administered in South Dakota with a South Dakota trustee or trustee agent. In this instance, there would be a South Dakota owner (e.g. trust or LLC) and the South Dakota premium tax would apply. (76)
If there are existing trusts in another state and a client wants to purchase PPLI in these trusts sitused outside of South Dakota to take advantage of the lower premium tax in South Dakota, a potential solution is for the client to form a South Dakota LLC with a resident co-managing member in South Dakota. The resident co-managing member of the LLC in South Dakota can then purchase PPLI within the LLC and allocate the LLC units to the out-of-state trusts; thereby utilizing South Dakota's low state premium tax with an existing out-of-state trust.
An important issue to consider regarding the state premium tax is the retaliatory tax. A retaliatory tax generally allows the state to whom the premium tax is paid to impose the premium tax of the state in which the insurance company is located, if that rate is higher. (77) By statute, South Dakota does not allow for the opportunity to charge a retaliatory tax for a large case. (78) It is also very important to verify that the domestic insurance companies recognize the low state premium taxes in South Dakota so that the South Dakota premium tax applies.
South Dakota statutes also allow for in-kind distributions of PPLI cash value during lifetime as well as PPLI death benefits. (79) The ability to pay in-kind distributions is important in the event that the underlying PPLI investments are in hedge funds and/or alternative investments which may have lockup periods of usually three to five years or more. In fact, South Dakota is unique in that it also allows for in-kind premiums on a case by case basis if approved by the insurance carrier as well as the South Dakota Division of Insurance. (80) Please note tax and legal counsel should also be consulted for such a transaction.
Lastly, South Dakota's insurable interest statute is one of the best in the country. (81) The statute was drafted in response to the "Chawla Problem." (82) The statute clarified the insurable interests of the trustee of a trust. (83) For example, the trustee has the same insurable interest that the settlor has, including an insurable interest in other individuals. Also, a trustee has the same insurable interest in a life that a beneficiary might have, including in the life of any other individual. Lastly, it should be noted that South Dakota's favorable insurable interest statutes also extend to LLCs. (84)
F. DOMESTIC ASSET PROTECTION
Trusts generally provide for excellent estate planning, wealth preservation, and asset protection. A self-settled trust is one of the more frequently used types of domestic asset protection trusts ("DAPT"). It is generally a discretionary irrevocable trust where the grantor/settlor is a permissible beneficiary. If properly structured, funded, and administered, creditors cannot generally reach the assets in a self-settled trust to satisfy the settlor's legal obligations. Only seventeen states, including South Dakota, currently have self-settled DAPT statutes. (85) A self-settled trust can be drafted to either keep trust assets within the settlor's estate or remove them, which allows a wealthy individual to establish a self-settled trust even though that individual's gift tax exemption has been fully utilized. (86) Furthermore, South Dakota has uniquely addressed Revenue Ruling 2004-64, (87) with SDCL section 55-1-36.1, which provides that the discretionary power to reimburse tax payments made by a grantor will not subject such payments or the trust property to the claims of creditors. (88)
South Dakota enacted its DAPT statutes in 2005. (89) Establishing a DAPT in a state like South Dakota is extremely advantageous because of the four levels of asset protection provided for in South Dakota. (90) Offshore asset protection has lost a lot of momentum as a result of these four levels of protection as well as the increased IRS scrutiny and reporting requirements (i.e., FBAR, FATCA, etc.) by the United States government.
Generally, the grantor or settlor places 10% up to 40% of their financial assets, or possibly other assets, into a DAPT to protect those assets from a possible future lawsuit. The amount and types of assets to be transferred are generally case by case. The settlor is a permissible discretionary beneficiary of the DAPT, but does not generally use the trust for everyday living expenses. This could weaken the asset protection as well as result in possible estate tax inclusion issues if a dynasty DAPT is involved. (91)
There are four levels of protection provided with a DAPT: the trust, the limited liability company ("LLC"), a discretionary interest provision, and a spendthrift provision. (92)
1. Level One: The Trust
A properly drafted, funded, and administered self-settled South Dakota DAPT is an irrevocable trust and allows the grantor or settlor to be a permissible discretionary beneficiary of the trust while generally preventing creditors of the settlor to reach the trust assets.
The key requirements of the South Dakota Self-Settled DAPT are: (1) no pre-existing understanding or arrangement between the settlor and the trustee; (2) the assets were not transferred fraudulently; (3) creditors of settlor are unable to access trust property interests as defined by state law (i.e. exception creditors); and (4) notice to the transferor's spouse if marital property versus separate property is transferred after marriage. (93)
Creditors may argue that there was a fraudulent conveyance to the trust. For this claim to prevail, the creditor must prove that there was intent to hinder, delay or defraud. This argument is subject to a "clear and convincing" standard of proof in South Dakota versus a "preponderance of the evidence" standard of proof provided for in many other DAPT states. (94) South Dakota's statute of limitation for a fraudulent conveyance is two years after which time a cause of action or claim for relief with respect to a transfer of the settlor's assets to a DAPT is extinguished, and the creditor may not be able to reach the assets. (95) If the creditor is an existing creditor at the time the DAPT is established, that creditor may also have the period of time starting from when the transfer is or reasonably could have been discovered by that creditor to bring its claim which is six months in South Dakota. (96) Some clients may start the discovery period by giving notice to potential creditors. Both the standard of proof (i.e. clear and convincing) and statutes of limitations are key factors to consider when selecting the DAPT situs, which is why South Dakota is one of the best DAPT jurisdictions. (97)
Generally, two steps would be required to prove a fraudulent conveyance in South Dakota. Step one would be an action to prove with clear and convincing evidence that the transfer to the trust was an action to hinder, delay or defraud the creditor within two years. (98) The second step would be to prove with clear and convincing evidence that the transfer of property to the trust was made to defraud that specific creditor. (99)
A creditor may also claim to be an exception creditor, that is, the creditor fits within a defined type or class, so that it may be able to reach the DAPT assets. Exception creditors vary by state statute. Some of the more common exception creditors are tort victims, divorcing spouses/marital property divisions and those receiving alimony or child support, and generally, any judgments in place at the time of the transfer regardless of state. For example, in Delaware, a possible exception creditor is a divorcing spouse regarding marital property, and/or child support and alimony; specifically, for transfers made to DAPTs before and after marriage. (100) In Alaska, a possible exception creditor is a divorcing spouse regarding marital property; however, only for transfers to DAPTS within thirty days before marriage unless the settlor gives notice to the other spouse or transfers after marriage. (101) Nevada does not provide exception creditors for divorcing spouses in regard to marital property, or alimony and child support, regardless of whether the transfer to the DAPT occurred before or after the marriage. (102) However, if such transfer to the DAPT violates a contract or a valid court order, which could be the case with alimony, child support or marital property division, then an exception creditor may be allowed if these occurred prior to funding the DAPT. (103)
On the other hand, South Dakota does not allow for exception creditors for divorcing spouses in regard to marital property for transfers made to the DAPT prior to the marriage; however, if the transfer to the DAPT occurred after marriage with marital property, then notice is required to be given to the spouse. (104) This is not a requirement with separate property. Additionally, child support and alimony are not exception creditors in South Dakota unless the child support or alimony was awarded prior to the transfer to the DAPT.
Most jurisdictions recognize trusts sitused in other jurisdictions in accordance with conflict of laws principles unless there is a strong public policy argument not to recognize the trust or there is not a substantial presence or enough ties to the trust situs state. (105) Many advisors claim that lack of notice, for example, to the spouse, regarding the transfer of martial property post-marriage could pose a strong public policy issue. South Dakota statute avoids this potential issue by requiring notice. (106) This is in contrast with some states, which are silent regarding the transfer of marital property post-marriage, which may prove problematic as seen in recent cases. (107) As such, the South Dakota statute requiring notice for the transfer of marital property (not separate property) to a trust post-marriage will likely prevent other jurisdictions from not applying South Dakota law due to public policy reasons if there is a substantial trust administration presence in South Dakota.
2. Level Two: LLC and Limited Partnership (LP) Statutes
The location of trust property is extremely important from an asset protection standpoint. Consequently, many individuals title assets located in other states to a South Dakota LLC or LP, which, in turn, are titled to a DAPT. Generally, the South Dakota trust is the sole member of the South Dakota LLC to maximize the asset protection. Not all DAPT states have statutes allowing for the trust to be the sole member. (108) Choosing South Dakota's LLC/LP statutes further ties the trust property to the jurisdiction of the self-settled trust, allowing for increased asset protection. The asset protection afforded by LLC and LP statutes varies by state, and South Dakota is one of the leading jurisdictions. It has "charging order" protection as the sole remedy, (109) which is generally considered the most desirable. (110) A charging order only gives a creditor the rights of a partnership or LLC interest, and it does not give a creditor any voting rights. A charging order is simply a right to a distribution (if and when one is ever made), and it leaves a creditor without any means to force a distribution. This results in a waiting game between the client and the creditor, often forcing the creditor to settle for significantly less than the original judgment amount.
3. Level Three: Discretionary Interest Statute
South Dakota was the first state to pass a "Discretionary Support Statute" in 2007. (111) According to many advisors, the Restatement (Third) of Trusts may have blurred the line, allowing for a fully discretionary trust to be attached by a beneficiary's creditors as a property interest. South Dakota codified the common law and Restatement (Second) of Trusts, which defines the types of interests a beneficiary has in a trust, and therefore, the rights of a beneficiary's creditors. (112) Consequently, a discretionary interest in a trust is not a property interest nor an entitlement in South Dakota. (113) Additionally, limited powers of appointment and remainder interests are also not property interests or entitlements. (114) This can become extremely advantageous from an asset protection standpoint. Alaska, Nevada, and Delaware all passed more limited versions of the South Dakota discretionary interest statute. (115)
4. Level Four: Spendthrift Trusts
As previously mentioned, only seventeen trust jurisdictions, including South Dakota, have self-settled domestic asset protection statutes. (116) Most jurisdictions, however, including South Dakota, offer some asset protection for both self-settled and third party trusts through the incorporation of spendthrift provisions into the trust. (117) A spendthrift clause prevents all but a few exception creditors from attaching a trust. Exception creditors are creditors that fit within a defined type or class, generally defined by statute, that are allowed to possibly reach the trust's assets. (118) In general, exception creditors can include tort victims, divorcing spouses and those receiving alimony or child support. (119) Two common exception creditors specifically related to the spendthrift clause are alimony and child support. (120) South Dakota has uniquely addressed these potential issues with the enactment of its Discretionary Support Statute so that a discretionary interest in a trust is not a property right or an entitlement. (121) This is especially relevant in light of a recent case in Florida where the court pierced the spendthrift clause of a third party trust to garnish the trusts' discretionary interests as well as in Massachusetts where the Massachusetts Supreme Court has left the door open for the courts to consider future distributions from third party discretionary trusts for purposes of property division in divorce. (122)
G. DAPT ATTACKS
Some of the more popular strategies for attacking DAPTs include: a fraudulent conveyance; the existence of exception creditors; a lack of substantial presence (i.e. sufficient trust administration in DAPT situs); strong publicly policy reasons for not recognizing the DAPT; and the Uniform Voidable Transactions Act. Additional strategies for attacking DAPTs are arguments that the trust is a sham, alter ego of the grantor, various constitutional arguments, and bankruptcy. (123)
In addition to the four levels of DAPT protection previously discussed, South Dakota has many other supporting statutes to further buttress its DAPTs. One South Dakota statute provides that South Dakota courts have exclusive jurisdiction over DAPT actions. (124) Additionally, if an action is not brought within South Dakota, the state provides for the automatic removal of a non-South Dakota trustee if the foreign court does not follow South Dakota's DAPT laws. (125) A successor trustee will then be appointed under the DAPT statute. (126) South Dakota law also protects advisors who create the DAPT. (127) Also, South Dakota awards attorney's fees to the prevailing party. (128) Consequently, if someone sues the trust and is unsuccessful, they will be required to reimburse legal fees to the trust. Lastly, South Dakota also limits judgments against trust assets only to the extent necessary to satisfy the transferor's debt to the creditor; thus preventing the DAPT from collapsing due to the creditor's judgment. (129) These laws, coupled with those previously discussed, all create major hurdles for creditors.
The latest potential issue for a DAPT is the proposed Uniform Voidable Transaction Act ("UVTA") that was adopted by the National Conference of Commissioners on Uniform State Laws in 2014. The UVTA amends and replaces the better-known Uniform Fraudulent Transfer Act ("UFTA"). Currently, eleven states have adopted the UVTA. (130) While the UVTA made several important changes to clarify the law in order to prevent debtors from intentionally avoiding their legitimate debts, many advisors question if the UVTA went too far in both its provisions and comments, particularly regarding DAPTs. (131) As such, advisors warn that the UVTA will not only impact the corrupt debtor (which it should), but it will also have the collateral effect of adversely affecting the individual who engages in certain sound and legitimate estate planning and wealth preservation techniques (which it should not). (132)
One of the many changes included in the UVTA was an addition of a governing law provision to the act. Specifically, Section 10 of the UVTA provides "[a] claim for relief... is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred." (133) Many advisors argue that this attempt to resolve the "conflict-of-laws analysis" negatively affects DAPTs by possibly designating the state law of the state where the transfer occurred. (134) This could eliminate all transfers to a DAPT from an individual in a non-DAPT UVTA state, undermining legitimate estate and wealth preservation planning. (135)
Regardless of whether this provision is the most efficient solution for determining governing law, or if it even works, many advisors suggest that DAPT proponents still have the ability to uphold a DAPT even if the settlor is living in a UVTA state, assuming the DAPT state has not adopted the UVTA in its entirety as currently drafted. (136) In the typical scenario, if the court in a UVTA state determines that a voidable transaction has occurred, then the creditor would seek to enforce that judgment in the DAPT state. The first question that a DAPT court may then ask is whether the DAPT state must recognize the non-DAPT state's holding that a voidable transaction occurred. Advisors suggest that absent a statute or case in the domicile state expressly stating that transfers to a self-settled trust in another state (i.e. DAPT) violates the domicile state's public policy, then the DAPT state court would not need to afford Full Faith and Credit to the judgment. While the comments of Section 4 of the UVTA infer that such transfers to DAPTs are per se voidable, the comments only cite to very old Pennsylvania case law and comments are not laws. (137) Therefore, some advisors have the opinion that unless specific case law or statutes exist in the UVTA state, no public policy argument would exist; a mere lack of DAPT legislation is not a public policy argument against the DAPT state. Thus, the DAPT state would not be required to afford Full Faith & Credit to the domicile state's judgment, even if the comments of the UVTA are adopted. (138)
Generally, the DAPT's state court and the client's state court would likely turn to the conflicts of laws analysis, as applied to trusts, to determine which state law would govern. (139) Specifically, Conflict of Laws Restatement (Second) [section]273 which states so long as there are sufficient contacts to a state, a settlor of a trust can designate laws that govern the instrument. (140) Additionally, [section] 270(a) of the Conflict of Laws Restatement states that [section] 273 applies so long as law does not violate a strong public policy of the state that has the most significant relationship to the trust. (141) Consequently, unless trust situs and trust administration ties are not strong enough (142) to the DAPT state pursuant to [section] 273 (e.g. the trust administration), and unless it can be shown that creating a DAPT in a DAPT state is a violation of the public policy of the settlor's domicile state (see discussion above), typically, the DAPT state's law would govern. Thus, the DAPT and its supporting laws would generally be upheld provided there was not a fraudulent conveyance, an exception creditor or any other issue pursuant to the DAPT state's laws. (143)
Estate planners in various states, particularly the DAPT states, need to be aware of the fact that, while the UVTA law prevents some abuses of asset protection trust planning, it can also go too far as currently drafted and prevent legitimate estate and wealth preservation planning which should not be happening. Many state legislatures are passing the UVTA without knowing the full details of the statute or its impact upon good estate planning. The proponents of the UVTA should be more transparent in their marketing of the statute to various state legislatures, and also alert the estate planning advisors in those states as well. In anticipation of the UVTA, South Dakota included language in its statutes that provides that its DAPT statute shall govern in the event of any conflict. (144) Thus, providing the South Dakota courts yet another provision to rely on in the event of conflict resulting from a judgment in a UVTA state.
H. COURT AWARD OF ATTORNEYS' FEES IN A TRUST CONTEST
South Dakota is unique in that the court may award attorneys' fees and costs to any prevailing party--Delaware provides for a similar award. Consequently, the trustee can be reimbursed for attorney's fees if the plaintiff loses in South Dakota. (145) Nevada is slightly different in that the Nevada statute appears to only permit a court to award attorneys' fees and costs to a prevailing petitioner, thus if the trust was sued by a beneficiary or a creditor, and the trust prevailed, permissible attorneys' fees under this section may not apply. (146) In Alaska, if a trust is voided or set aside, the court may award attorney fees. Hence, somewhat similar to Nevada, an Alaska court may award attorney fees only if the petitioner wins and the trust is voided or set aside. (147) This would apply to any litigation involving the trust, and would presumably apply to a creditor if such were to bring a suit and lose.
South Dakota allows trust documents to require arbitration if a dispute arises between beneficiaries or a fiduciary under the trust. (148) The statute provides that such arbitration be enforceable pursuant to South Dakota's Uniform Arbitration Act. (149) The statute as of the date of this article is silent on whether attorneys' fees and costs may be awarded to any prevailing party. South Dakota does specifically provide that such arbitration is enforceable and provides appeal options in the state court; potentially a key factor in order to minimize consequences regarding income, estate, gift and generation-skipping transfer (GST tax) associated with an arbitration clause. (150)
J. PURPOSE TRUST
South Dakota has one of the broadest dynasty purpose trust statutes in the U.S. Generally, a purpose trust is a trust that is created for a purpose (something) rather than for beneficiaries (someone). Commonly, trusts need to have beneficiaries for whom the trust is established, for instance for individual family members or a charity. With a purpose trust, a trust enforcer is generally appointed to make sure the purpose is enforced. The purpose trust also usually has a trust protector and an administrative directed trustee. The trust protector and enforcer can generally be the same person or committee. Once the purpose has ended, purpose trusts can convert to beneficiary trusts if desired or be distributed to family, friends or charity. (151)
Broad purpose trusts like South Dakota's may not be established in every state. Although all states allow for pet trusts (a form of purpose trust to care for a pet), which are more limited in scope. Some states also allow for honorary trusts (trusts with the limited purpose to care of a gravesite), such as Nevada and Alaska. South Dakota is one of a very few states that allows for purpose trusts to be established for any lawful purpose, not just for the pets or honoraries. (152) Further, South Dakota is unique in that it allows for a perpetual purpose trust (i.e., the purpose trust has no restriction as to length of time it can be in existence) with a specific unlimited duration Murphy RAP statute. (153) Consequently, a South Dakota purpose trust can last in perpetuity if desired. (154) This means that the grantor's intent to care for an asset and/or provide trust funds for the specific purpose can be carried out for as a long as desired, an important consideration in establishing a purpose trust in South Dakota. This can also be key for pet trusts, as some states limit the duration of such trusts to a set period (e.g., 21 year term is common) which may be problematic as many animals may live beyond that period (e.g., horse 25-30 years, macaw 35-60 years, tortoise 100 years, donkey 45 years, eagle 55 years, parrot 80 years, and American box turtle 123 years). Many of these shorter term states have amended their statutes to accommodate either the twenty-one year term or the life of the animal, whichever is longer. None of this is an issue for South Dakota with its unlimited duration statute.
Some of the common purposes for a purpose trust may be: care of pets, including offspring (e.g., dogs, cats, horses, birds, tortoises, snakes, etc.); maintenance of grave sites and related religious ceremonies (honorary); maintenance of family property (e.g., antiques, cars, jewelry, memorabilia, etc.); cryogenic suspension of humans and pets; maintenance of an art collection; maintenance of family homes (residence and vacation); long-term maintenance of building, property or land; maintenance of business interests, royalties, and digital assets; philanthropic purposes not qualifying for a charitable deduction; maintenance of Private Family Trust Companies (PFTCs); and maintenance of Special Purpose Entities. (155)
K. REFORMATION/MODIFICATION AND DECANTING
It may be helpful to reform, modify or decant, and thus, modernize many existing, older irrevocable trusts. Modification, reformation, and decanting of trusts have all gained popularity as a result of modern trust laws, the Uniform Principal and Income Act, the Uniform Prudent Investor Act, directed trust laws, changes in family circumstances, and/or a desire to change trust administration. South Dakota provides some of the nation's top rated and most flexible modification, reformation, and decanting statutes for the purpose of changing the trust situs and modernizing preexisting trusts from other trust jurisdictions. (156) This has become especially powerful given the recent case law in other jurisdictions which have limited the flexibility to both modify/reform and modernize existing trusts. (157)
The ability to modify/reform the trust can generally be inserted into a trust document at its creation. Additionally, some types of reformations/modifications may also take place without language in the trust document if state law permits. Also, trust protectors generally have the ability to reform and modify trusts. (158) Reformations and modifications are generally easiest when both the grantor and the beneficiaries are alive and all agree with the changes. Additionally, both minor and unborn beneficiaries can be represented pursuant to a state's virtual representation statutes. (159)
Some states, including South Dakota, permit a trustee or beneficiary to petition the court to modify or reform the administrative or dispositive terms of the trust. (160) South Dakota has one of the most experienced accommodating, efficient and cost effective judicial reformation/modification processes in the country. (161) This can be done if circumstances, which were not anticipated by the grantor, have arisen and if the modification of the trust would substantially further the trust or the purpose for creating the trust. (162) Additionally, the reformation can generally be accomplished in order to conform the terms due to a mistake of fact or law, and the grantor's intent can be established. (163) In order to achieve the grantor's tax objectives, the terms of a trust instrument may be construed or modified in a manner which will not violate the grantor's probable intention. (164) South Dakota provides for non-judicial reformation as well; allowing for such if all beneficiaries consent. (165)
By naming a South Dakota trustee, the South Dakota trustee is able to reform or modify an existing trust by utilizing the South Dakota courts. In return, the trustee is able to modernize the trust; for example, reforming or modifying a delegated trust to a modern directed trust structure with a Trust Protector. Once reformed or modified, the trust will have the original jurisdiction's law for interpretation, construction and validity, but utilize South Dakota's law for administration purposes.
Some common reasons why a trust would be reformed/modified are: (1) adding a directed trust structure with investment and distribution committees/advisors; (2) adding a trust protector; (3) changing the governing law applicable to the trust; (4) adding flexibility regarding the appointment of trustees and other fiduciaries; (5) improving the trust's governance structure; (6) modernizing an outdated trust agreement; (7) improving the tax provisions; (8) saving state income taxes; (9) and changing dispositive provisions. (166) It is important to note that the trust duration (i.e., the applicable RAP) may not be reformed or modified. (167)
Flexibility to modify or reform existing trusts in jurisdictions like South Dakota as trust laws and family situations change is extremely important. Additionally, such flexibility is important as clients continue to comparison-shop trust jurisdictions, and as more and more states improve their trust laws.
Decanting is the process of distributing trust property from an existing trust to a new trust. (168) Some trusts provide the trustees the power to decant in a trust document. More than twenty-four states, including South Dakota, have enacted decanting statutes. (169) A trust generally permits trustees to pay principal from the trust to one or more beneficiaries, which is known as the power to invade the trust. For instance, if the trustee has any discretion over income or principal, South Dakota's decanting statute permits a South Dakota trustee to pay property to another trust for one or more beneficiaries. (170)
One alternative to decanting is to reform and modify the trust, as previously discussed, but at the same time restate the trust. Consequently, the reformed or modified and restated trust could utilize the state law of the restated trust jurisdiction for interpretation, construction, validity, and administration. Decanting does not require court involvement in South Dakota, however, a decant can be blessed by the court in South Dakota if desired. (171) On the other hand, a reformation or modification and restatement generally does involve a court and notice to beneficiaries. In South Dakota, providing notice to the beneficiaries regarding the decanting is optional. (172) Also, the South Dakota decanting statute allows for the granting of powers of appointment to beneficiaries of the new trusts which potentially can be key in preventing future disputes. (173)
3. Decanting Process
Reformation and modification both result in keeping the original trust, whereas "decanting" results in the transfer of assets from an existing trust to a newly created trust. (174) For example, a South Dakota trustee may be appointed to an existing trust, and then the South Dakota trustee would decant (i.e., distribute trust assets) to a newly drafted South Dakota trust. South Dakota's top-rated decanting statute provides a lot of flexibility for trust remodeling. (175)
Decanting utilizes the trustee's power to distribute assets into a new trust which is usually a South Dakota law trust with a South Dakota trustee; thereby applying South Dakota law for interpretation, construction, validity and administration. Hence, removing the ties to the original jurisdiction's laws for interpretation, construction, validity, and administration as is the case in a reformation or modification and restatement. Moreover, the new trust to which the decant took place may also include modern trust structures; for example, a directed trust with a trust protector. (176)
Common reasons to decant include:
(1) modifying powers of appointment; (2) amending administrative provisions of a trust; (3) adding spendthrift protections; (4) adding (or removing) grantor trust provisions; (5) qualifying a trust as a qualified subchapter S trust, a QDOT, an IRA conduit trust, etc.; (6) combining trusts for greater efficiencies; (7) separating trusts to allow investment philosophies to be "fine-tuned" for beneficiaries; (8) segregating higher risk assets; (9) avoiding state and local taxes; (10) reducing distribution rights for Medicaid eligibility planning purposes; (11) amending trustee succession provisions, removing or replacing a trustee; (12)extending the term of a trust; (13) changing the governing law provisions of a trust; (14) correcting a scrivener's error or ambiguity; (15) decanting a beneficiary's share of a trust to a supplemental needs trust in order to preserve or obtain eligibility for public benefits. (177)
Please also note that Dynasty Trusts, although less common, can be excellent candidates for decanting if the trust is in a less desirable Dynasty Trust jurisdiction. (178)
Lastly, if the governing law of an existing trust can be changed pursuant to the trust document to South Dakota for administrative purposes, then the South Dakota statute allows the trustee to utilize the South Dakota decanting statute to decant into a new trust. (179) Additionally, a South Dakota trustee initially may be named to a non-South Dakota trust to then decant. These powerful features allows a trust from another state to appoint a South Dakota trustee who can thereby take advantage of South Dakota's decanting statute. Alternatively, the client's current trust situs state may also have a trust decanting statute. Consequently, South Dakota's modern trust, asset protection, and tax laws have made decanting an appealing option for many clients.
L. PRIVACY FOR COURT MATTERS INVOLVING TRUSTS
South Dakota is the only automatic total seal privacy state for all court matters involving trusts. (180) This applies to court reformations/modifications, court sanctioned decants, trust litigation, as well as any other court matters involving a trust. Generally, other states keep trust matters public with few exceptions and the trend is public in most states. Delaware will seal trust information for three years in select cases, then open it to the public. (181) Consequently, South Dakota's automatic and perpetual privacy statute is unique.
M. BENEFICIARY QUIET STATUTES
South Dakota's beneficiary quiet statute was enacted in 2002. (182) Many families do not want the trust beneficiaries to know of the existence of a trust or the trust assets for various reasons, which vary from family to family. Consequently, many state's statutes allow the grantor to modify the notice requirements in order to waive notice to one or more beneficiaries of any trust related information. (183) For example, Alaska allows a grantor to exempt the trustee from the notice requirements, but only for the life of the grantor or until the grantor's incapacity, whichever is shorter. (184) South Dakota's top rated statute, however, allows for beneficiary waiver of notice, while also providing that the grantor, trust advisor or trust protector, by the terms of the governing instrument, may expand, restrict, eliminate, or otherwise modify the rights of beneficiaries to acquire trust information. (185) Consequently, the beneficiary quiet can extend beyond the grantor's death or disability with discretion given to the trust protector which is a key advantage. Delaware is not as broad as it limits the quiet period to a "period of time" and does not expressly allow for a trust advisor or protector to modify notice to beneficiaries. (186) Nevada just passed a statute similar to Delaware in 2015. (187)
N. FAMILY ADVISOR STATUTE
South Dakota recently enacted a statute in 2016 that allows for the position of a family advisor. (188) This useful statute allows a person to be appointed as a family advisor that consults or advises a fiduciary (e.g. trustees, investment advisors, or distribution advisors) regarding fiduciary or non-fiduciary matters. (189) This provides an opportunity for lawyers, certified public accountants, and other advisors serving as fiduciaries and trustees in another jurisdiction to maintain a key advisory role with the family trusts, while minimizing personal liability as well as possible tax and asset protection issues. Importantly, the family advisor is authorized to act only in a non-fiduciary capacity. (190)
Specifically, the statute provides the family advisor the ability to exercise various powers. For example, the family advisor may remove and appoint a trustee, a fiduciary, trust advisor, investment committee member or distribution member, and may appoint a successor trust protector or successor family advisor. (191) Also, the family advisor may advise the trustee on matters concerning a beneficiary, receive trust accountings and investment reports, attend meetings and consult with a fiduciary or advisor on both fiduciary and non-fiduciary matters, all without any power to take any action as a fiduciary. (192) Lastly, the family advisor may provide direction regarding notification of qualified beneficiaries. (193) Powers granted to the family advisor are in sole discretion of family advisor and the family advisor liability is generally limited to dishonest or improper motives. (194) Consequently, the statute provides even more flexibility to families by allowing the appointment of additional family advisors to assist the family with the directed trust structure.
O. SPECIAL SPOUSAL TRUST (COMMUNITY PROPERTY TRUST)
With the estate tax exemption currently at $5.49 million per spouse in 2017, (195) many couples are turning to income tax planning. The South Dakota special spousal trust ("SST") was enacted in 2016, making South Dakota one of only three states to allow individuals to opt in to community property laws via trust and to provide a unique strategy to save income taxes. (196) Specifically, one of the key benefits of the SST is the potential to receive a 100% step-up in cost basis of assets held in the SST at the death of the first spouse. This is in contrast to non-community property states (i.e. joint property) where at the death of the first spouse, the surviving spouse does not receive a full step-up in cost basis. Instead, with joint property, the surviving spouse only receives a partial increase in cost basis. Consequently, only one-half of the joint property included in the gross estate pursuant to IRC Section 2040 would receive an IRC Section 2014 cost basis adjustment. There is no basis adjustment of the other half. (197)
For example, assume a husband and wife owned securities in a joint property state. Their basis in the securities is $5,000,000. At the time of husband's death, the fair market value of the securities was $10,000,000. Even if no estate tax return is required to be filed, wife's basis in the securities would be $7,500,000 (one-half at the original basis of $5,000,000, divided by two and one-half at the fair market value of $10,000,000 divided by two). If the surviving spouse then sold the securities at fair market value ($10,000,000), they would expose $2,500,000 gain to capital gains tax. If, however, the husband and wife placed the securities into a South Dakota SST, at the death of the first spouse, the asset would receive a step-up in basis to the current fair market value for the entire asset ($10,000,000). The then surviving spouse could sell the appreciated asset for the fair market value ($10,000,000) with no tax consequences (i.e. avoiding the capital gains that would have resulted without the full step-up in basis). Hence, the statute provides yet another powerful tool to South Dakota's modern trust laws, allowing for grantors to utilize the unique features of community property law, particularly, the step-up in basis at the death of the first spouse, for income tax planning. (198)
P. DOMESTIC TRUST PLANNING FOR INTERNATIONAL FAMILIES (199)
Until the last few years, the main reasons for an international family to set-up a United States situs trust was only if they owned United States property or if they had a United States green card and/or United States citizen family members. International clients will still seek out United States situs for those reasons, however, the international climate both politically and regulatory have greatly expanded the scenarios in which international families are seeking out the United States as a favorable trust situs.
Some of the more specific and common reasons why international families are looking for United States trust situs and a United States trustee include: (1) improved U.S. trust and tax laws; (2) blacklisting of offshore jurisdictions by resident country; (3) political stability and protection of the United States; (4) Forced Heirship protection; (200) (5) secrecy wall falling apart globally; (6) ownership in residential and/or commercial property in the U.S.; (7) purchasing U.S. life insurance; (8) family members in the United States ; (9) marriage by a U.S. citizen to a non-U.S. resident; (10) foreign resident coming to the United States to work or live; (11) and the Common Reporting Standard ("CRS"). (201) The following are some of the popular domestic trust planning options for international families.
1. South Dakota Foreign Grantor/Non Grantor Trust
A South Dakota Foreign Grantor Trust is established as a "foreign" trust for United States tax purposes and therefore is treated the same as an offshore trust but administered in South Dakota by a South Dakota trustee. This is a popular trust for non-resident aliens ("NRAs") with foreign beneficiaries and property who are looking for political stability, protection of property, and non-blacklisted countries. Typically, these South Dakota Foreign Grantor Trusts are revocable and provide for the foreigner and their spouse for their lifetimes, and upon their death, the trusts are distributed outright or in trust for their children.
Commonly, the NRA establishes a foreign trust in the United States with a United States trustee to hold shares of the non-United States entity. This entity is utilized to hold foreign property. Consequently, if there are no United States situs assets then there are no United States income, gift, and estate taxes. The non-United States entity can also hold United States situs assets producing income, resulting in the 30% withholding taxes or treaty rates to be withheld at the entity level. Both federal and state capital gains are generally saved as well as United States estate taxes with the non-United States entity holding United States situs assets such as publicly traded securities. Alternatively, disregarded domestic LLCs are also utilized for this structure and owned by the Foreign Grantor Trust, but may result in United States estate taxes.
In certain instances, NRAs may find it beneficial to have the trust drafted as a South Dakota Foreign Irrevocable Non-Grantor Trust for added asset protection purposes. The structure and benefits are similar to the South Dakota Foreign Grantor Trust discussed above. Much like the Foreign Grantor Trust, the Foreign Non-Grantor Trust is a popular trust for NRAs with foreign beneficiaries and property who are looking for political stability, protection of property, and to avoid the blacklisting issues of many of the offshore trust jurisdictions. The Foreign Non-Grantor trust is also best for NRAs who are not anticipating current U.S. beneficiaries, as the trust is deemed far less desirable with U.S. beneficiaries due to administrative complexities and potential negative tax consequences. (202)
2. South Dakota NRA Dynasty Trust
Generally, if a foreign citizen dies leaving assets in an offshore trust to a United States beneficiary, there are burdensome tax and compliance issues. The establishment of an NRA Dynasty Trust while the foreign parents or grandparents are alive provides a very favorable option for an international family.
If properly done, an NRA foreign citizen parent or grandparent can transfer an unlimited amount of assets onshore into a South Dakota NRA Dynasty Trust without any gift, death, or generation-skipping taxes. They are not subject to the $5.49 million gift and generation skipping transfer tax exemption limits of a United States citizen or green card holder. (203) Further, assets are not subject to state income tax because the trust is in South Dakota. Additionally, the South Dakota Dynasty Trust can continue forever for the benefit of United States beneficiaries as well as provide creditor protection and the many other trust, asset protection, and tax benefits previously discussed.
3. South Dakota Stand-by/Pour Over Dynasty Trust
The stand-by or pour-over South Dakota Dynasty Trust is a strategy for foreign citizens with United States beneficiaries that have established foreign trusts in offshore jurisdictions. The stand-by Dynasty Trust both lessens and avoids burdensome income tax filing requirements for the United States beneficiaries and the negative United States income tax rules on distributions of accumulated income. Upon the grantor's death, the foreign trust "pours over" the offshore trust assets to an existing (nominally funded) stand-by South Dakota domestic Dynasty Trust for the benefit of U.S. beneficiaries.
4. Foreign Change of Situs
NRAs may have existing offshore trusts that they may wish to transfer to the United States. Generally, the situs of a foreign (offshore/non-U.S. law) trust can be transferred to the United States. This is often accomplished by utilizing a South Dakota domestic corporate trustee. The domestic trustee typically reviews the existing trust as well as a newly drafted domestic trust. Thereafter, the domestic trustee declares the new United States trust (or offshore trustee declares) with the purpose of the new trust as part of the declaration. The foreign trustee then pays over trust assets with a deed of distribution to the new domestic trust. This may also be accomplished via a decant. It is important to note that there may be potential tax issues (e.g., UNI, accumulations distributions and throwback rules) with either method of changing the situs of an offshore foreign trust to United States situs. However, if there are U.S. beneficiaries of a foreign trust that does not change situs before the death of the foreign Grantor, the U.S. tax reporting obligations are extremely burdensome.
The transfer allows the NRA to benefit from United States situs as well as the modern trust laws of the state, such as South Dakota, in which the new trust is located (e.g., directed trust, trust protector, privacy, forced heirship, ability to reform, modify and restate in the future for the trust for administrative purposes).
5. Pre-immigration Planning with Self-Settled Trusts
Substantial planning opportunities exist for NRAs who anticipate immigration to the United States. Prior to immigration to the United States, the NRA makes a gift to a South Dakota self-settled trust with the NRA as a permissible discretionary beneficiary. If properly structured and administered, these trusts will generally avoid gift, estate, and GST taxation. After immigration, if the Grantor, as a permissible beneficiary, needs assets, they can be distributed by an independent trustee on a discretionary basis. If properly structured, the assets may also be excluded from one's estate as well as protected from creditors and lawsuits.
South Dakota is at the forefront of the modern trust situs states as a result of the support it receives from its governors, Division of Banking, state legislatures, trust committee, and most recently its trust association, combined with its great economy and powerful trust, tax, and asset protection laws. (204) South Dakota has been an industry leader with its codification of several top-rated, key trust concepts and other related legislation. Such legislation includes statutes regarding: (1) Murphy pre-1986 RAP (1983); (2) directed trusts (1997); (3) trust protectors (1997); (4) lowest state premium tax (eight basis points (2001-2016)); (5) domestic asset protection trusts (2005); (6) purpose trusts (2006/2008); (7) beneficiary quiet (2002); (8) the private family trust company (1995); (9) automatic total seal privacy for all court matters in perpetuity (1998); (10) the Special Purpose Entity ("SPE") (2011); (11) decanting (2007) and modification/reformation (1998); (12) Special Spousal Trust (2016); (13) the family advisor statute (2016); and (14) an attractive jurisdiction for international families (1995).
These key South Dakota statutes, as well as the statutes of many of the other boutique trust states, have led the evolution and development of the modern trust, resulting in the increase of irrevocable gifts to trusts from 12.5% in 1995 to 40% in 2016. Consequently, a record-breaking number of new South Dakota situs trusts have been created as well as existing trusts changing situs to South Dakota and reforming/modifying or decanting to take advantage of these modern trust, asset protection, and tax laws. Additionally, private trust company assets increased in South Dakota from $35 billion in 2005 to $150 billion in 2016. In addition, a record number of more than eighty regulated Private Family Trust Companies have been established in South Dakota, making it an industry leader. South Dakota also has one of the strongest economies of the dynasty boutique trust states. (205) Lastly, according to the FDIC, South Dakota has more bank assets ($3.15 trillion) than New York, California, and all of the other top dynasty jurisdictions (e.g. Alaska, Delaware, Nevada, and Wyoming) combined. A powerful story!
AL W. KING, III & PIERCE H. MCDOWELL, III ([dagger])
([dagger]) Al W. King, III and Pierce H. McDowell, III are the Co-Founders, Co-Chairmen, and Co-Chief Executives of South Dakota Trust Company LLC (SDTC). SDTC, founded in 2002, is a national trust boutique serving wealthy families all over the world with currently more than $35 billion in assets under administration. Prior to forming SDTC, Mr. King and Mr. McDowell were responsible for the founding of Citicorp Trust South Dakota in 1995. During that time, Mr. King served as Managing Director and National Director of Estate Planning for Citigroup (1992-2001) and Vice Chairman of Citicorp Trust South Dakota (1995-2001). Mr. McDowell served as President and Chief Trust Officer of Citicorp Trust South Dakota (1995-2001). This article is based on a presentation given by the authors at The South Dakota Law Review Symposium on April 1, 2016, with the same title.
(1.) Governor Bill Janklow (1979-1987 and 1995-2003), Governor George S. Mickelson (1987-1993), Governor Walter Dale Miller (1993-1995), Governor Mike Rounds (2003-2011) and Dennis Daugaard (2011-present). South Dakota: Past Governors Bios, NAT'L. GOVERNORS ASS. (Apr. 7, 2017), https://www.nga.org/cms/home/governors/past-governors-bios/page_south_dakota.html.
(2.) Director Richard Duncan, Director Roger Novotny and Director Bret Afdahl (current). Past Directors of the Division of Banking, S.D. DEP'T. OF LABOR & REG. DIVISION OF BANKING (Apr. 7, 2017), www.dlr.sd.gov/banking/about_us_past_directors.aspx.
(3.) Directors: Larry Deiter (2015--Present), Merle D. Scheiber (2005-2014), Gary Steuck (2003-2005) Wendell Malsam (2003) Darla Lyon (1991-2003), Mary Jane Cleary (1987-1991), Susan Walker (1983-1987) and Henry Lussem Jr. (1980-1983).
(4.) In October 1997, Governor Bill Janklow signed Executive Order 97-10 establishing the first Trust Task Force in South Dakota. STATE OF SOUTH DAKOTA OFFICE OF THE GOVERNOR EXECUTIVE ORDER 97-10 (1997), http://dlr.sd.gov/banking/trusts/trust_task_force_documents/executive_order_97_10.pdf. The original Trust Task Force members in 1997 were: Frances Becker (Rushmore Bank & Trust, currently South Dakota Trust Company LLC); Richard J. Corcoran (First National Bank Sioux Falls); the Honorable Barbara Everist (State Senator); Thomas J. Flynn (First Bank Systems); Thomas H. Foye (Bangs, McCullen, Foye & Simmons); Charles M. Habhab (Norwest Bank); David L. Knudson (Chief of Staff for Governor; Davenport, Evans, Hurwitz & Smith); Bruce O. Ley (Bank of the West); Pierce H. McDowell III (Citicorp Trust South Dakota, currently South Dakota Trust Company LLC). South Dakota Task Force on Trust Administration Review and Reform Membership, S.D. DEP'T. OF LABOR & REG. DIVISION OF BANKING (Jan. 13, 2017), https://dlr.sd.gov/banking/trusts/trust_task_force_documents/trust_task_force_membership.pdf. Current Trust Task Force members are: Mark G. Mickelson (Mickelson & Company, LLC); Robin Aden (First Bank & Trust); Frances Becker (South Dakota Trust Company LLC); Todd J. Bernhard (Delta Trust); Jennifer E. Bunkers (Boyce Law Firm); Jeb Clarkson (Pioneer Bank & Trust); Richard J. Corcoran (The First National Bank in Sioux Falls); Dan Donohue (Davenport, Evans, Hurwitz & Smith, LLP); Patrick G. Goetzinger (Gunderson, Palmer, Nelson & Ashmore, LLP); Bradley C. Grossenburg (Woods, Fuller, Shultz & Smith, PC); Charles M. Habhab (at large); Dave G Hottman (First Premier Bank) Pierce H. McDowell, III (South Dakota Trust Company LLC); Terry Prendergast (Murphy, Goldammer & Prendergast, LLP); Peter J. Randazzo (Citicorp Trust South Dakota); Carl A. Schmidtman (Dorsey & Whitney Trust Company, LLC); Thomas Simmons (University of South Dakota School of Law); Mark Sivertson (Dacotah Bank); Richard Westra (Dacotah Bank); Marcia Hultman (State of South Dakota, Dept. of Labor and Regulation); Bret Afdahl (State of South Dakota, Division of Banking, Director); Liza Clark (State of South Dakota, Office of Gov. Daugaard; Policy Advisor). Id.
(5.) As a result of the incredible growth of South Dakota's trust industry, the South Dakota Trust Association was established in 2015 to bring like-minded Public Trust Companies and individuals together in order to further grow [ foster and promote] the trust industry in South Dakota." Bringing Public Trust Companies Together, S.D. TRUST Ass'N (2016), http://sdtrustassociation.org/.
(6.) 71 T.C. 671(1979).
(7.) Id. at 681.
(8.) The only reported case involving Section 2041(a)(3) of the Internal Revenue Code ("IRC") is Murphy. See Richard W. Nenno, Perpetual Dynasty Trusts: Tax Planning and Jurisdiction Selection, A.B.A ASS'N (Oct. 21, 2011), http://www.americanbar.org/content/dam/aba/events/taxation/taxiq-fall11-nenno-dynasty-paper.authcheckdam.pdf. In the case, the Tax Court held that the exercise of a limited power of appointment to create another limited power of appointment did not spring the Delaware Tax Trap because, under applicable Wisconsin law, the exercise of a limited power of appointment did not commence a new perpetuities period. Murphy, 71 T.C. at 681. Consequently, the Delaware Tax Trap was not violated in Wisconsin, which had a perpetuities statute expressed in terms of a rule against suspension of the power of alienation rather than a rule based on the remoteness of vesting. Id. at 678.
(9.) S.D.C.L. [section] 43-5-8 (1983); WIS. STAT. [section] 700.16 (West 2001 & Supp. 2015).
(10.) IDAHO CODE [section][section] 55-111, 55-111A (West 2012).
(11.) DEL. CODE ANN. tit. 25, [section] 503 (West 2014). See also H.R. 245, 138th Gen. Assemb, Reg. Sess. (Del. 1995). Bill synopsis:
Several states, including Idaho, Wisconsin and South Dakota, have abolished altogether their rules against perpetuities, which has given those jurisdictions a competitive advantage over Delaware in attracting assets held in trusts created for estate planning purposes. At one time, Delaware's 110-year rule against perpetuities for trusts was the longest period in the nation for holding property in trust. The multi-million dollar capital commitments to these irrevocable trusts, and the ensuing compound growth over decades, will result in the formation of a substantial capital base in the innovative jurisdictions that have abolished the rule against perpetuities. Several financial institutions have now organized or acquired trust companies, particularly in South Dakota, at least in part to take advantage of their favorable trust law. Delaware's repeal of the rule against perpetuities for personal property held in trust will demonstrate Delaware's continued vigilance in maintaining its role as a leading jurisdiction for the formation of capital and the conduct of trust business.
(12.) Stephen E. Greer, The Alaska Dynasty Trust, 18 ALASKA L. REV. 253, 276 (2001).
(13.) ALASKA STAT. ANN. [section] 34.27.051 (West 2016); ALASKA STAT. ANN. [section] 34.27.100 (West 2016). While Alaska adopted an opt-out type perpetuities statute in 1997 for certain trusts, an attempt was made in 2000 to adopt a Murphy-type statute to potentially resolve the RAP problem by adopting a 1,000-year power of appointment (POA) statute. There is no authority for this approach to dealing with the RAP.
(14.) See Daniel G. Worthington & Mark Merric, Which Situs is Best in 2016?, TRUST & ESTATES, 61 (Jan. 2016); Jesse Dukeminier & James E. Krier, The Rise of the Perpetual Trust, 50 UCLA L. REV. 1303,1314(2003).
(15.) Worthington & Merric, supra note 14. See also Garrett Moritz, Dynasty Trusts and the Rule Against Perpetuities, 116 HARV. L. REV. 2588 (2003); Max M. Schanzenbach & Robert H. Sitkoff, Perpetuities or Taxes? Explaining the Rise of the Perpetual Trust, 27 CARDOZO L. REV. 2465 (2006); Steven J. Horowitz & Robert H. Sitkoff, Unconstitutional Perpetual Trusts, 67 VAND. L. REV. 1769 (2014); Daniel G. Worthington, The Problems and Promise of Perpetual Trust Laws, TRUSTS & ESTATES (Dec. 2004).
(16.) Worthington & Merric, supra note 14.
(17.) WIS. STAT. [section] 71.14(2)-(3) (West 2010).
(18.) For example, in Alaska, Delaware, Florida, New Hampshire, Nevada, South Dakota, Washington, and Wyoming. WOLTERS KLUWER CCH TAX LAW EDITORS, 2016 STATE TAX HANDBOOK (2015). However, Nevada recently enacted a "Commerce Tax," effective July 1, 2015, which taxes business activity in the state when in-state revenues are in excess of $4,000,000 annually and requires informational reporting for in state revenue amounts below $4,000,000. Nevada Governor Signs New "Commerce Tax" Into Law, DELOITTE (June 10, 2015), https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-mts-alert-nevada-governor-signs-new-commerce-tax-into-law.pdf; Nevada Legislature Approves New "Commerce Tax " and Other Tax Law Changes, DELOITTE (June 5, 2015), https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-mts-nevada-legislature-approves-new-commerce-tax.pdf It appears as though the Commerce Tax does not apply to trusts, but many advisors claim that it is unclear if the trusts hold Nevada business interests whether the tax applies. Id. Alaskan Governor Bill Walker also recently proposed a state income tax due to budget shortfall. Kirk Johnson, As Oil Money Melts, Alaska Mulls First Income Tax in 35 Years, NEW YORK TIMES (Dec. 25, 2015), https://www.nytimes.com/2015/12/26/us/as-oil-money-melts-alaska-mulls-first-income-tax-in-35-years.html?_r=0. This was the first income tax proposal in thirty-five years and is due to the low price of oil. Id.
(19.) N.H. REV. STAT. ANN. [section] 77:10 (West 2012 & Supp. 2015). New Hampshire originally had a dividends and interest tax on all N.H. residents which included unborn dynasty trust beneficiaries. Id. New Hampshire has since modified their statute so that unborn beneficiaries are considered New Hampshire residents and not subject to the dividends and interest taxes. Id. See also TENN. CODE ANN. [section] 67-2-102 (West 2013 & Supp. 2016) (discussing dividends and interest tax).
(20.) See, e.g., Chase Manhattan Bank v. Gavin, 733 A.2d 782 (Conn. 1999) (holding, as constitutional, the income tax on trusts, which had been held unconstitutional by other courts); D.C. v. Chase Manhattan Bank, 689 A.2d 539 (D.C. 1997) (holding that though another state court may also have jurisdiction, D.C. also retains jurisdiction due to power to tax trust, even if the trustee, trust assets, and trust beneficiaries are located outside D.C). In 2014, New York enacted legislation that implemented an accumulated earnings tax, and treats South Dakota incomplete non-grantor trusts (i.e. South Dakota Incomplete Non-Grantor Trusts ("INGs")) as grantor trusts for income tax purposes. 2014 N.Y. Laws 59, Part I (Mar. 31, 2014). California long arm statute taxes are applied if: California fiduciaries, California source income and/or California non-contingent beneficiaries are present. CAL. REV. & TAX CODE [section]17742 (West 2017). There has also been a trend to more favorable court rulings in Pennsylvania and Illinois on the topic. See, e.g., McNeil v. Commonwealth of Pa., 67 A.3d 185 (Pa. Commw. Ct. 2013); Linn v. Dep't of Revenue, 2 N.E.3d 1203 (Ill. App. Ct. 2013).
(21.) Worthington, supra note 15, at 15.
(22.) Horowitz & Sitkoff, supra note 15, at 1772.
(23.) The nine states are Arizona, Arkansas, Montana, Nevada, North Carolina, Oklahoma, Tennessee, Texas and Wyoming. Of these states, Arizona, Nevada, North Carolina, Tennessee and Wyoming have all enacted longer term perpetuity statutes, thus raising possible issues. Nevada claims to have dealt with the issue through their courts. See Bullion Monarch Mining, Inc. v. Barrick Goldstrike Mines, Inc., 345 P.3d 1040 (Nev. 2015) (determining rule against perpetuity for commercial mining agreements with payments of royalties).
(24.) 439 U.S. 299(1978).
(25.) See, e.g., James Mateja, Car Loans Becoming Hard to Get, CHICAGO TRIBUNE (Mar. 18, 1980), http://archives.chicagotribune.com/1980/03/18/page/35/article/car-loans-becoming-hard-to-get.
(26.) Marquette Nat 'I Bank, 439 U.S. at 301.
(27.) Secret History of the Credit Card: Interview Bill Janklow, FRONTLINE (Nov. 23, 2004), http://www.pbs.org/wgbh/pages/frontline/shows/credit/interviews/janklow.html.
(28.) S.D.C.L. [section] 54-3-13 (2004); 1980 S.D. Sess. Laws ch. 331, 536-37.
(29.) Authors were involved with Citibank and Citicorp Trust South Dakota's trust marketing efforts. Al King, III, was National Director of Estate Planning for Citibank from 1992 to 2001. During that time, Al King saw an article written by Pierce McDowell, III, titled The Dynasty Trust: Protective Armor Generations to Come, and published in the October 1993 Trust & Estate Magazine. Pierce McDowell wrote the article at the suggestion of New York/Chicago attorney Roy Adams. The article discussed the many advantages of South Dakota trust situs which Al King read at the suggestion of New York lawyer Ralph Engel, and brought to the attention of Citibank management. Shortly thereafter, Citibank hired Pierce McDowell at the suggestion of Roy Adams and a major business plan was executed. Citicorp Trust South Dakota was operational within six months as part of their subsidiary, Citibank, South Dakota's credit card bank. Pierce McDowell was elected President, Al King was Vice Chairman, and several credit card executives were also on the board. Citicorp Trust South Dakota became operational in 1995. Extensive marketing of South Dakota's trust capability followed. First, Dan Worthington and Pierce McDowell authored a South Dakota article in November 1995. Daniel G. Worthington et al., The South Dakota Difference: Family Wealth Preservation Through Charitable and Dynamic Planning, SOUTH DAKOTA SERIES, Nov. 1995, at 1. Then, Pierce McDowell, III, Dan Worthington and Al King, III authored an April 1996 Trust & Estate magazine article. Al W. King III, Pierce H. McDowell III & Daniel G. Worthington, Dynasty Trusts: What the Future Holds for Today's Technique, 135 TRUSTS & ESTATES 28 (Apr. 1996). Third, Dan Donahue chaired a session at the American Bar Association in 1997 Annual meeting in San Francisco entitled Forum Shopping for Dynasty Trusts? Where do we send our Clients and their Money with panelists being the late Thomas Foye, Charles Park, Gideon Rothschild and Al King. Al King and Pierce McDowell also averaged over 125 speeches per year across the country for Citibank and Citigroup from 1995 to 2001 on why South Dakota is such an attractive trust jurisdiction. Finally, the growth of the South Dakota trust industry since 1995 was well documented by Professor Robert. H Sitkoff and Professor Max M. Schanzenbach. Robert. H Sitkoff & Max M. Schanzenbach, Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes, 115 Yale L.J. 356 (2005).
(30.) DEL. CODE ANN. tit. 25, [section] 503 (West 2014). See also, H.R. 245, 138th Gen. Assemb, Reg. Sess. (Del. 1995).
(31.) See generally Al W. King III, Unlimited Duration Trusts-Why, When, Where and How?-Your Clients Will Hot Live Forever, But Their Family Values Will, Address Before Minnesota's Thirty-Ninth Annual Probate & Trust Law Conference (June 2013); Al W. King III, The 21st Century Family Bank Dynasty Trust: What, Why, When, Where, How, Who?, Family Office Exchange Webinar: (2010) (on file with author); Al W. King III, Generation Skipping Tax (GST) Planning In Uncertain Times, Forty-Seventh Annual Conference, Nat'l Ass'n of Est. Planners Councils (NAEPC) Found. (Sept. 2010); Al W. King III, The Latest Trends and Strategies with Multigenerational Trust Planning, AALU Executive Summary (2009); Al W. King III, Fall Forum Resource Center White Paper: The Modern Dynasty Trust - Flexibility and Control, FAM. OFFICE EXCHANGE (Oct. 2009); Gift Planning Strategies and Trust Opportunities, 11th Annual Estate Planning Symposium, CalCPA Peninsula/Silicon Valley (2012); Al W. King III, A Generation-Skipping Trust: Unlimited Duration? Why Not?, 138 Vol. TRUSTS & ESTATES 8 (June 1999); Al W. King III, Modern Trusts Are Being Created with More Flexibility Resulting in Assets Remaining in Trust for Longer Periods of Time, 138 TRUSTS & ESTATES 28 (Jan. 1999); Al W. King III, The Modern Dynasty Trust: Flexibility is More Important Than Ever, 131 TRUSTS & ESTATES 32-36 (Jan. 1998); Al W. King III & Ralph M. Engel, The Dynasty Trust, CPA J., Sept. 1996; Al W. King III, Pierce H. McDowell III & Daniel G. Worthington, Dynasty Trusts: What the Future Holds for Today's Technique, 135 TRUSTS & ESTATES 28 (Apr. 1996).
(32.) See generally Al W. King, III, & Pierce H. McDowell, III, Delegated Vs. Directed Trusts, 145 TRUSTS & ESTATES 26 (2006); Al W. King III, Drafting Modern Trusts, TRUSTS & ESTATES (2015); Al W. King, III, Myths About Trusts and Investment Management: The Glass is Half Full!, TRUSTS & ESTATES (2014); Al W. King III & Pierce McDowell, III, Fall Forum Resource Center White Paper: South Dakota Directed Trusts, Trust Protectors & Special Purpose Entities, FAM. OFFICE EXHANGE (July 2010); Al W. King III, 2010: Uncertainty Means Opportunity for Modern Trust Planning, Year End Forum for Private Investors, Inst. For Private Inv. (Dec. 2009); Al W. King III, Advanced & Creative Estate Planning (with a Modern Corporate Trustee) in an Uncertain Tax and Economic Environment, Soc'y of Fin. Servs. Profs. (SFSP) (Jan. 2006); Al W. King III, Advanced Planning with a Modern Corporate Trustee, Int'l Forum (Jan. 2005); Iris J. Goodwin & Pierce McDowell, III, Delegating Fiduciary Investment Responsibility: Trustees Explore the Once Taboo, 138 TRUSTS & ESTATES 8 (1999).
(33.) See, e.g., S.D.C.L. [section] 55-5-16 (2012). Generally, a delegated trust is one in which the trustee has contracted with a third party agent to perform some or all of the trustee's discretionary investment management or related functions with respect to the trust. Id. The trustee of a delegated trust generally will design an investment policy statement as well as have some duties regarding due diligence, ongoing monitoring, and selection of the investment manager.
(34.) Daniel G. Worthington, Perpetual Trust States--The Latest Rankings, TRUSTS & ESTATES (Jan. 2007). Both Delaware and South Dakota have two of the first directed trust statutes in the U.S. Delaware's statute was effective in 1986, and South Dakota's statute was effective in 1997. On the other hand, South Dakota's Dynasty statute was effective in 1983 and Delaware's Dynasty statute, effective in 1995, was in response to South Dakota and Citibank's effective marketing efforts in 1995. See DEL. CODE ANN. Tit. 12, [section]3313(b) (West 2007); S.D.C.L. [section][section] 55-1B-2(l) (Supp. 2016), 55-1B-5 (2012).
(35.) See Al W. King, HI, Myths About Trusts and Investment Management: The Glass is Half Full!, TRUSTS & ESTATES (2014) (explaining the investments and allocations of Yale and Harvard's endowments).
(36.) Id.; Al W. King, III, Selecting Modern Trust Structures and Administration Based Upon a Family's Assets, Advisor's Roundtable, IPI (Mar. 10, 2015).
(37.) See Duemler v. Wilmington Trust Co., C.A. No. 20033 NC, 2004 Del. LEXIS 206, *l-3 (Del. Ch. Nov. 24, 2004). The Duemler case involved a directed trust invested in a non-diversified portfolio with extremely risky assets. Id. The administrative trustee forwarded a prospectus to investment advisor. Id. The investment advisor, however, did not provide the administrative trustee with any direction. Id. Consequently, the investment experienced a significant drop in value. Id. The court upheld a directed trust statute which stated the investment advisor must make decisions in isolation without oversight from administrative trustee. Id. The court further stated that if the directed administrative trustee was required to oversee the investment advisor, the role of directed administrative trustee would not function because the directed administrative trustee would be required to second guess the investment advisor, and as such, that would not be the intent of the directed trust statute. Id.
(38.) King, III, Selecting Modern Trust Structures and Administration Based Upon a Family 's Assets, supra note 36.
(39.) See I.R.C. [section] 672(c) (2012) (defining "related or subordinate party").
(40.) See, e.g., ALASKA STAT. [section]13.36.375 (West 2017); DEL. CODE ANN. tit. 12 [section] 3313 (West 2017); NEV. REV. STAT. [section]163.5549 (2007 & Supp. 2015); N.H. REV. STAT. ANN. [section] 564-B:8-808(b) (2007 & Supp. 2015); TEX. PROP. CODE ANN. [section] 114.003 (West 2015); WY. STAT. ANN. [section] 4-10-712 (2015).
(41.) See King, III, Selecting Modern Trust Structures and Administration Based Upon a Family 's Assets, supra note 36.
(42.) S.D.C.L. [section] 55-1B-6 (2012 & Supp. 2016). The South Dakota trust protector statute came in play as a result of the authors experience at Citibank dealing with international clients domesticating their trusts and advisors inquiring about the existence of a trust protector statute in South Dakota. The idea of a domestic trust protector statute was presented by the authors to the Trust Task Force committee in 1996, and the first trust protector statute was passed in 1997.
(43.) ALASKA STAT. ANN. [section] 13.36.370 (2014); DEL. CODE ANN. tit. 12, [section] 3313 (2007); N.H. REV. STAT. ANN. [section] 564-BT2-1201 (2007 & Supp. 2015); WYO. STAT. ANN. [section][section] 4-10-710, 711 (2015); See also ALEXANDER A. BOVE, JR., TRUST PROTECTORS: A PRACTICE MANUAL WITH FORMS (Juris Publishing, Inc. 2014).
(46.) S.D.C.L. [section] 55-1B-1(2) (2012 & Supp. 2016).
(47.) S.D.C.L. [section] 55-3-20.1 (2012 & Supp. 2016); S.D.C.L. [section][section] 21-22-1, 9 (2012 & Supp. 2016).
(48.) ALASKA STAT. ANN. [section] 13.36.370 (2014); DEL. CODE ANN. tit. 12, [section] 3313 (2007); N.H. REV. STAT. ANN. [section] 564-B:12-1201 (2007 & Supp. 2015); WYO. STAT. ANN. [section][section] 4-10-710, 711 (2015); see also ALEXANDER A. BOVE, JR., TRUST PROTECTORS: A PRACTICE MANUAL WITH FORMS (Juris Publishing, Inc. 2014). See also S.D.C.L [section] 55-1B-6 (Supp. 2016) (providing examples of the powers that may be provided to the trust protector).
(49.) S.D.C.L. [section] 51A-6A-66 (Supp. 2016). South Dakota and New Hampshire, as of 2015, are the only two states to recognize the SPE by statute. Prior to the South Dakota SPE statute being passed in 2011, SPEs were informally approved by the South Dakota Division of Banking and South Dakota Legal Opinion. The first informal approval in 2006 involved a client of the authors and a New York law firm. This was the beginning of the modern SPE.
(50.) See infra Part II.D (explaining the details of a PFTC).
(51.) See Al W. King, III, The Private Family Trust Company and Powerful Alternatives, 9 TRUSTS & ESTATES (2016).
(54.) N.H. REV. STAT. ANN. [section] 383-C: 12-1202 (Supp. 2015).
(55.) Al W. King III, Planning Opportunities Using Domestic Trust Jurisdictions, Purposeful Planning Institute--Fusion Collaboration, Broomfield, Colorado (July 2016).
(56.) South Dakota is considered the industry leader in regulated private trust companies with more than eighty PTCs in July 2016. Nevada and Wyoming are often considered the industry leaders for unregulated private trust companies. Additionally, Florida, New Hampshire and Tennessee have also enacted PFTC statutes, but are lacking regarding experience.
(57.) See King, III, The Private Family Trust Company and Powerful Alternatives supra note 51. See also Al W. King III, Another Look at Private Trust Companies, FAM. OFFICE ASS'N PODCAST (Jan. 28, 2016); Al W. King III, Unique Modern Trust Structures for Family Offices, Advisors Roundtable, San Francisco, Calif, IPI (Sept. 2014); Matt Tobin, Making Sense of Situs for Private Family Trust Companies, Family Office Exchange Webinar (Mar. 2017); Al W. King III, Pierce McDowell III & Matthew Tobin, Private Family Trust Companies, and Other Modern Trust Structures, Family Office Exchange Member Event, New York, NY. (Sept. 2012); Al W King III et al., Private Family Trust Company, NYSSCPA--1st Annual Family Office Conference (Feb. 2011); Al W. King III & Pierce McDowell, III, Fall Forum Resource Center White Paper: Private Trust Company 101, FAM. OFFICE EXCHANGE (Oct. 2009); Al W. King III, The 21" Century Private Family Trust Company, Family Office Metrics Webinar (Dec. 2009); Al W. King III & Pierce McDowell, III, Fall Forum Resource Center White Paper: Trust Administration of the Ultra Wealthy: The Private Family Trust Company and Other Key Alternatives, FAM. OFFICE EXCHANGE (Oct. 2009); Al W. King III & Pierce H. McDowell III, Expert Perspectives on the Private Trust Company (and Other Trust Administration Alternatives for Family Offices), Family Office Exchange Symposium (Apr. 2008).
(59.) South Dakota has the lowest capital requirement for a regulated private trust company in the United States at $200,000 (for comparison, New Hampshire at $250,000, Nevada at $300,000, and Wyoming at $500,000). King, III, The Private Family Trust Company and Powerful Alternatives, supra note 51.
(60.) See King, III, Planning Opportunities Using Domestic Trust Jurisdictions, supra note 55.
(61.) In addition to $200,000 of capital required for a South Dakota private trust company, generally overall set up fees average $100,000 and overall annual operational fees are approximately the same. See King, III, Private Family Trust Company, supra note 57.
(62.) Shortly after enacting PFTC legislation in Florida, emergency "glitch" bills were introduced to correct problems with the legislation. See generally Stephen G. Vogelsang, The New Florida Family Trust Company Act, FL. BAR J., Vol. 89, 9 (Nov. 2015); Oaktone Law Update: Florida Family Trust Company Glitch Bill Dies, OAKSTONE LAW, http://oakstonelaw.com/2015/05/19/florida-family-trust-company-glitch-bill-dies/ (last visited Apr. 15, 2017).
(63.) See King, III, Planning Opportunities Using Domestic Trust Jurisdictions, supra note 55.
(64.) The South Dakota and Wyoming Divisions of Banking are both accredited with the Conference of State Bank Supervisors, but the Divisions of Banking in Nevada and New Hampshire are two of only four states that are not accredited as of August 2016. Please note that a state can be a member, but not accredited. Accredited State Banking Departments, CONF. OF ST. BANK SUPERVISORS, https://www.csbs.org/development/accreditation/Documents/Accredited%20Banking%20Departments%20as%20of%2010.25.16.pdf (last visited Jan. 9, 2017).
(65.) 552 U.S. 181(2008).
(66.) Treas. Reg. [section] 1.67-4(d) (2014). These final regulations were issued on May 9, 2014, after the decision in Knight. Id.
(67.) See I.R.S. Notice 2008-63, I.R.S. Priv. Ltr. Rul. 200546055 (Nov. 18, 2005); I.R.S. Priv. Ltr. Rul. 200548035 (Dec. 2, 2005); I.R.S. Priv. Ltr. Rul. 20053003.
(68.) In the mid-1990s, prior to the enactment of PTC legislation in South Dakota, Pierce McDowell met with Ed Ahrens and Don Delf (who at the time were at Arthur Anderson, LLP) at the United Airlines lounge in Denver International Airport. During their conversation, Ed and Don suggested to Pierce that South Dakota should enact a PTC statute. Thereafter, Ed, Don and Pierce designed a PTC statute that was used as the model for the PTC legislation enacted in South Dakota. Pierce presented the model statute to the late South Dakota attorney Jerry Murphy, who took the lead on getting the legislation passed. Subsequently, the authors utilized the South Dakota PTC statute in 1995 to set up Citibank's PTC within its credit card bank in South Dakota. This entity remained state chartered for trust situs purposes versus leveraging Citibank's national charter. After leaving Citibank, the authors utilized the South Dakota PTC statute once again by establishing South Dakota Trust Company LLC in 2002. The authors were also presented with the idea at SDTC of being a corporate agent for a commercial PTC being formed by an Ohio firm to provide the proper nexus to South Dakota (i.e. office, administrative assistant, service of process agent, South Dakota board of director, and forwarding mail and phones, etc.). Consequently, this launched the commercial PTC business. Serving as corporate agent to this Ohio firm led to providing similar services to ultra-wealthy families. Additionally, trust administration services were provided to both commercial and family PTCs with SDTC serving as trustee agent.
(69.) See generally Al. W. King, III & Pierce H. McDowell, III, Trust Administration: The Domestic Advantage, in THE PPLI SOLUTION: DELIVERING WEALTH ACCUMULATION, TAX EFFICIENCY, AND ASSET PROTECTION THROUGH PRIVATE PLACEMENT LIFE INSURANCE 79, 80-82 (Kirk, Loury eds., 2005) (explaining different types of premium taxes); Al W. King III, Fall Forum Resource Center White Paper. Large Domestic Insurance Premiums--Do Not Forget to Plan for the State Premium Tax, FAM. OFFICE EXCHANGE (Oct. 2009); Al W. King III, Pierce H. McDowell III & Steven J. Oshins, Sale To A Defective Trust: A Life Insurance Technique, 137 TRUSTS & ESTATES 35 (1998); Al W. King III, Unique and Creative Uses of Modern Trusts Involving Investments and Insurance (June 16, 2015); Al W. King III, Creative Uses of Life Insurance in Trust Planning (June 2006).
(70.) Al W. King, III & Pierce H. McDowell, III, State Premium Tax Planning: Strategize With Clients to Minimize Costs Incurred with Large Domestic Insurance Policies, 150 TRUSTS & ESTATES 25 (June 2011). Prior to 2001, the South Dakota premium tax was 250 basis points on all premiums. The authors were at Citibank at the time working with various insurance professionals to modify the South Dakota premium tax and other laws so as to accommodate the domestic PPLI business. Alaska's premium tax was at ten basis points at the time the South Dakota proposal to lower South Dakota to eight basis points for premiums over $100,000 was introduced. The $100,000 threshold came into play when the authors found out that historically most premiums in South Dakota had been lower than $100,000, so if the proposal was to lower the premium tax only for premiums above $100,000, then it would not affect the South Dakota premium tax revenue, but would generate additional revenue from non-South Dakota residents. Consequently, the eight basis points premium tax was passed in 2001 and remained the lowest in the U.S. until 2016. Additionally, several other favorable insurance related laws were also passed making South Dakota the jurisdiction of choice for large insurance policies.
(71.) Al W. King, III & Pierce H. McDowell, III, Powerful Private Placement Life Insurance Strategies with Trusts that Every Estate Planner Should be Aware Of TRUSTS & ESTATES (Apr. 2016).
(72.) For example, California 235 bpts, Connecticut 200 bpts, Florida 175 bpts, Nevada 350 bpts, New Jersey 200 bpts, and New York 200 bpts. See Wolters Kluwer CCH, supra note 18.
(73.) H.B. 237, 148th Gen. Assemb. Reg. Sess. (Del. 2016). Please note that on May 5, 2016, Delaware signed into law HB 237 in an attempt to compete with the lower premium tax states such as South Dakota on private placement life insurance. Delaware lowered its premium tax from 200 bpts to 0 bpts in excess of $100,000 for trust owned life insurance policies covering the life of an individual that participates in private placement under federal securities laws. However, it appears that Delaware's low premium tax does not apply to policies owned by LLCs; South Dakota on the other hand provides its low premium tax for both trust and LLC owned policies. Moreover, Delaware continues to lack many of the supporting insurance laws as well as the experience of South Dakota.
(74.) See Al W. King, III & Pierce H. McDowell, III, Powerful Private Placement Life Insurance Strategies with Trusts that Every Estate Planner Should be Aware Of, supra note 71. Michael Liebeskind & Al W. King, III, Webinar: Income and Estate Planning with Private Placement Life Insurance (PPLI) and Private Placement Annuities (PPA), TRUSTS & ESTATES (Apr. 2016).
(75.) PPLI is essentially a flexible premium variable universal life ("VUL") insurance transaction that occurs within a private placement offering. The private placement component adds extensive flexibility to the VUL product pricing and asset management offerings. Because PPLI is sold through a private placement memorandum, every situation can be individually negotiated and custom-designed for the client. PPLI can be for single life or survivorship and is offered only to an accredited investor. PPLI has both a death benefit and a cash value (that is, investment account) and is generally designed to maximize cash value and minimize death benefits. Consequently, PPLI is usually designed as a non-modified endowment contract (non-MEC) policy, with four to five premiums versus a single premium policy (that is, a MEC). In this way, cash values can be accessed tax-free during an insured's lifetime. The PPLI cash value is generally invested among a variety of available registered and non-registered fund options (that is, hedge funds, private equity ("PE") and other alternative investments). See Al W. King, III & Pierce H. McDowell, III, Powerful Private Placement Life Insurance Strategies with Trusts that Every Estate Planner Should be Aware Of supra note 71.
(77.) Al W. King, III & Pierce H. McDowell, III, State Premium Tax Planning: Strategize With Clients to Minimize Costs Incurred with Large Domestic Insurance Policies, supra note 70; Al. W. King, III & Pierce H. McDowell, III, Trust Administration: The Domestic Advantage, supra note 69.
(78.) See S.D.C.L. [section] 58-6-70 (2004 & Supp. 2017) (The retaliatory tax provision "does not apply to life policies where the total first year premium is equal to or greater than one hundred thousand dollars and to annuity contracts where the total first year consideration is equal to or greater than five hundred thousand dollars.").
(79.) S.D.C.L. [section][section] 58-15-17, -26, -26.2, -33 (2004 & Supp. 2016).
(80.) Please note there may be negative tax consequences if appreciated property is contributed as premium. This is not a very common strategy onshore as it may be offshore.
(81.) S.D.C.L. [section] 58-10-4 (2004 & Supp. 2016).
(82.) See Chawla ex rel Giesinger v. Transamerica Occidental Life Ins.Co., No. Civ.A. 03-CV-1215, 2005 WL 405405, at *6-7 (E.D. Va. 2005), aff'd in part, vac'd in part, 440 F.3d 639 (4th Cir. 2006) (holding that a trust did not have an insurable interest in the life of the insured who was the settlor and the creator of the trust, but was later vacated by the Fourth Circuit and affirmed on other grounds).
(83.) S.D.C.L. [section]58-10-4(2016).
(84.) S.D.C.L [section]58-10-17 (2016).
(85.) Al W. King III, A Domestic Asset Protection Trust Update: Important Strategies, Statutes & Cases, PAC Seminar for Professionals (June 2016). They include Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Id.
(86.) In Private Letter Ruling 200944002 the IRS concluded that a "trustee's discretionary authority to distribute income/or principal to Grantor, does not, by itself, cause Trust corpus to be includable in Grantor's gross estate under [section] 2036."
(87.) Rev. Rul. 2004-64, 2004-2 C.B. 7 stated that where the trust's governing instrument or applicable local law gave the trustee the discretion to reimburse the grantor for that portion of the grantor's income tax liability, that that discretion, by itself, would not cause inclusion in the grantor's gross estate under section 2036.
(88.) S.D.C.L. [section]55-1-36.1 (2016).
(89.) S.D.C.L. [section][section] 55-16-1 to -16 (2012 Supp. 2016). See Francis R. Becker, Asset Protection Planning under South Dakota's New Legislation, NAT'L NETWORK OF EST. PLANNING (Sept. 2005) (discussing South Dakota asset protection legislation). Attorney Charles D. ("Skip") Fox IV, formerly with Schiff Hardin, LLP in Chicago, and now McGuireWoods LLP in Virginia, gave key testimony to the Trust Task Force which led to the enactment of the DAPT legislation.
(90.) See generally, Al W. King III, Planning with South Dakota Domestic Asset Protection Trusts, A.B.A. (June 2015); Al W. King III, Asset Protection Planning in the 21st Century--Fortifying an Estate Plan, Todorovitch Lecture (Mar. 2011); Al W. King III, 2014: Domestic Asset Protection Trust Planning, Ave Maria School of Law (Apr. 2014).
(91.) See generally, Al W. King, III, Defend Against Attacks on DAPTs?, TRUSTS & ESTATES (Oct. 2014); Roy Adams, "A Comparison of Domestic and Foreign Trusts for Meaningful Creditors' Protection Planning and Other Relevant Uses," at 7, Cannon Financial Institute (Aug. 2002); Roy Adams, "How to Protect Your Assets and Those of Others Under Applicable State and Federal Laws," Cannon Financial Institute, Inc. (June 2003). Many advisors take the position that if a grantor has to live off a self-settled trust that is supposed to be excluded from his/her estate that it may pose a IRC [section]2036 and IRC [section] 2038 problem. Whereas if the grantor does not take any distributions or any periodic distributions for hardships, then there should not be any IRC [section] 2036 or IRC [section]2038 problems.
(92.) Al W. King III, Webinar: Planning with South Dakota Domestic Asset Protection Trusts, A.B.A. (June 2015).
(93.) S.D.C.L. [section] 55-16-15 (2012 & Supp. 2016). South Dakota requires notice to the spouse if marital property is transferred after marriage. Notice is not required if single property is transferred during marriage. See also Al W. King III, 5V" Annual Hawaii Tax Institute: Key Considerations in How to and How Not to Structure Domestic Asser Protection Trusts (DAPTs) For Maximum Effectiveness (Nov. 2014).
(94.) S.D.C.L. [section]55-16-10(3) (2012 & Supp. 2016). See also Mark Metric & Daniel G. Worthington, Best DAPT Jurisdictions Based on Three Types of Statutes, TRUSTS & ESTATES (Jan. 2017).
(95.) Compare S.D.C.L. [section]55-16-10(1)(a) (2012 & Supp. 2016), and NEV. REV. STAT. ANN. [section] 166.170(1)(a)(1) (2014) (setting a statute of limitations to two years after the transfer is made in Nevada), with ALASKA STAT. ANN. [section] 34.40.110(d)(1)(A) (2014) (setting a statute of limitations to four years after the transfer is made in Alaska), DEL. CODE ANN. Tit. 6, [section] 1309(2) (West 2016) (setting a statute of limitations to four years after the transfer is made in Delaware), N.H. REV. STAT. ANN. [section] 545-A:9(I) (2007) (setting a statute of limitations to four years after the transfer is made in New Hampshire), and WYO. STAT. ANN. [section] 34-14-210(a)(i) (2015) (setting a statute of limitations to four years after the transfer is made in Wyoming).
(96.) Compare S.D.C.L. [section]55-16-10(1)(b) (2012 & Supp. 2016), NEV. REV. STAT. ANN. [section] 166.170(1)(a)(2) (2014) (setting the statute of limitations to six months after discovery of the transfer in Nevada), and ALASKA STAT. ANN. [section] 34.40.110(d)(1)(B) (2014) (setting the statute of limitations to six months after discovery of the transfer in Alaska), with DEL. CODE ANN. Tit. 6, [section] 1309(1) (West 2016) (setting the statute of limitations to one year after discovery of the transfer in Delaware), N.H. REV. STAT. ANN. [section] 545-A:9(I) (2007) (setting the statute of limitations to one year after discovery of the transfer in New Hampshire), and WYO. STAT. ANN. [section] 34-14-210(a)(i) (2015) (setting the statute of limitations to one year after discovery of the transfer in Wyoming).
(97.) S.D.C.L. [section] 55-16-10(1)(b) (2012 & Supp. 2016).
(98.) Id. [section][section]55-16-9-10(1)(a).
(99.) Id. [section][section] 55-16-9-10.
(100.) DEL. CODE ANN. TIT. 12, [section] 3573 (West 2016).
(101.) ALASKA STAT. [section] 34.40.110 (2014). Please note if such transfer to the DAPT violates a judgement entered by a court which could be the case with alimony, child support or marital property division, then an exception creditor may be allowed if these occurred prior to funding the DAPT. See supra note 90.
(102.) NEV. REV. STAT. ANN. [section] 166.170(3) (2014).
(104.) S.D.C.L. [section][section] 55-16-9, -10, -15 (2012 & Supp. 2016). South Dakota's DAPT statute went into effect July 1, 2005 with a four year fraudulent conveyance period. This was reduced to three years effective July 1, 2008 and then to two years effective July 1, 2012. Additionally, the spousal notice provisions became effective July 1, 2014.
(105.) See RESTATEMENT (SECOND) OF CONFLICT OF LAWS [section][section] 270, 273 (AM. LAW INST. 1971) (discussing conflict of laws for trusts).
(106.) S.D.C.L. [section] 55-16-15 (2012 & Supp. 2016). Please note this does not apply to single property transferred post-marriage.
(107.) See, e.g., Dahl v. Dahl, 2015 UT 23, [paragraph][paragraph] 16, 23, 345 P.3d 566, 577-78 (Utah 2015) (holding that a spouse had an enforceable interest in a Nevada asset protection trust by reasoning that a strong public policy existed in favor of the equitable distribution of marital assets upon divorce, and thus, disregarding the Nevada choice of law provision in the trust).
(108.) S.D.C.L. [section] 47-34A-504(g) (2016).
(109.) S.D.C.L. [section] 47-34A-504 (2007 & Supp. 2016); S.D.C.L. [section]48-7-703 (2004 & Supp. 2016).
(110.) See supra note 90; Patrick G. Goetzinger, A Dynamic Duo: South Dakota's Trust Laws & Business Entity Statutes, 61 S.D. L. REV. 339 (2016).
(111.) Mark Metric & Daniel G. Worthington, Best DAPT Jurisdictions Based on Three Types of Statutes, TRUSTS & ESTATES (Jan. 2017); Al W. King, III, The Trust Spendthrift Provision--Does it Really Protect?, TRUSTS & ESTATES (Dec. 2016).
(113.) S.D.C.L. [section] 55-1-38 (2012). See also supra note 90; Mark Merric & Daniel G. Worthington, Find the Best Situs for Domestic Asset Protection Trusts, TRUSTS & ESTATES (Jan. 2015), http://www.internationalcounselor.com/Articles/Asset%20Protection%20Articles/Best%20DAPT%202015%20Article.pdf; Francis Becker & Pierce McDowell, III, Estate Planning Newsletter #104: Where Should You Situs Your Trust? A Look at South Dakota 's New Third Party Discretionary--Support Statute, LISI (May 10, 2007).
(114.) King, III, supra note 90; Becker & McDowell, supra note 111.
(115.) Merric & Worthington, supra note 111.
(116.) King, III, supra note 91.
(117.) S.D.C.L. [section]55-1-41(2012).
(118.) King, III supra note 111.
(121.) King, III, supra note 90.
(122.) See Berlinger v. Casselberry, 133 So.3d 961, 962 (Fla. Dist. Ct. App. 2013), appeal denied (holding that Florida allows a court to order a writ of garnishment against a third party discretionary trust, thereby piercing the spendthrift). See also Pfannenstiehl v. Pfannenstiehl, 55 N.E.3d 933, 941-42 (Mass. 2016) (overruling the Massachusetts Appeals Court's holding that a husband's beneficial interest in a discretionary spendthrift trust, subject to an ascertainable standard with an open class of beneficiaries, was too speculative to constitute a property interest and instead was only an expectancy). It is important to note that the Massachusetts Supreme Court left the door open for future courts to "consider the expectancy [of a distribution] 'as part of the opportunity of each (spouse) for future acquisition of capital assets and income,'" id. at 935 (quoting Mass. Gen. Laws Ann. ch. 208, [section] 34 (West 2017)), and even stated that "the existence of a spendthrift provision alone does not bar equitable division of a trust." Id. at 942. Furthermore, the lower appeals court in Pfannenstiehl focused on the ascertainable standard found in the trust, finding that the trustees were obligated "to distribute the trust assets to the beneficiaries, including the husband, for such things as comfortable support, health, maintenance, welfare, and education." Pfannenstiehl v. Pfannenstiehl, 37 N.E.3d 15, 24 (2015). Moving forward, such reasoning could prove problematic in states without a discretionary support statute codifying the Restatement (Second) of Trusts. King, III, supra note 1111; Alexander A. Bove, Jr., Estate Planning Newsletter #2447: Pfollowing the Pfamous Pfannenstiehl Case, LISI (Aug. 18, 2016).
(123.) King III, supra note 90.
(124.) S.D.C.L. [section] 55-16-13 (2012 & Supp. 2016).
(125.) S.D.C.L. [section] 55-3-47 (2012).
(127.) S.D.C.L. [section] 55-16-13 (2012 & Supp. 2016).
(128.) See infra Part II. H (discussing court awards of attorney's fees in trust actions).
(129.) S.D.C.L. [section] 55-16-13 (2012 & Supp. 2016). See also S.D.C.L. [section] 55-1-26, -28, -41, -43 (2012 & Supp. 2016) (preventing judicial foreclosure as well as denying creditors the power to force distributions from trusts in general).
(130.) See Voidable Transactions Act Amendments (2014)--Formerly Fraudulent Transfer Act, UNIFORM LAW COMMISSION, http://www.uniformlaws.org/Act.aspx?title=Voidable%20Transactions%20Act%20Amendments%20(2014)%20-%20Formerly%20Fraudulent%20Transfer%20Act (last visited May 1, 2017) (showing California, Idaho, New Mexico, North Dakota, Minnesota, Iowa, Michigan, Kentucky, North Carolina, Utah and Georgia have enacted the UVTA in the "Enactment Status Map").
(131.) See George Karibjanian et al., New Uniform Voidable Transactions Act: Good for the Creditors' Bar, But Bad for the Estate Planning Bar?--Part Two, LEIMBERG INFO. SERVS. (Mar. 15, 2016). See also, George Karibjanian, Gerard Wehle, & Robert Lancaster, History Has Its Eyes on UVTA--A Response to Asset Protection, LEIMBERG INFO. SERVS. (Mar. 15, 2016); Richard W. Nenno & Daniel S. Rubin, Transfers to Self-Settled Spendthrift Trusts by Settlors in Non-APT States Voidable Transfers Per Se? #327, LEIMBERG INFO. SERVS. (Aug. 15,2016).
(132.) Karibjanian et al., supra note 131; Al W. King, III, Be Aware of the Uniform Voidable Transactions Act, TRUSTS & ESTATES (Oct. 2016).
(133.) UNIF. VOIDABLE TRANSACTIONS ACT [section] 10 (NAT'L CONF. OF COMM'R ON UNIF. STATE LAWS 2014), http://www.uniformlaws.org/shared/docs/Fraudulent%20Transfer/2014_AUVTA_Final%20Act_2016mar8.pdf.
(134.) King, III, supra note 132.
(136.) Karibjanian et al., supra note 131.
(137.) UNIF. VOIDABLE TRANSACTIONS ACT [section] 4 cmt. (NAT'L CONF. OF COMM'R ON UNIF. STATE LAWS 2014), http://www.uniformlaws.org/shared/docs/Fraudulent%20Transfer/2014_AUVTA_Final%20Act_2016mar8.pdf.
(138.) King, III, supra note 132.
(140.) RESTATMENT (SECOND) OF CONFLICT OF LAWS [section] 273 (AM. LAW INST. 1971).
(141.) Id.[section][section] 270(a), 273.
(142.) In re Huber, 493 B.R. 798, 809 (Bankr. W.D. Wash. 2013) (providing a useful lesson on how not structure a DAPT to receive maximum situs protection and how not to administer a DAPT in light of the substantial presence test of Conflicts Restatement [section]273). The court held that Washington held the most significant relationship with the Alaska DAPT, not Alaska, and thus Washington law applied. Id. The trust named an Alaskan corporate trustee in the DAPT state (Alaska) but named the settlor's son, based in Washington, as co-trustee. Id. at 805. The settlor's son made frequent distributions to the settlor. Id. This activity was one of the many factors that made the Alaska trustee look like a "straw man." Id. at 806. Additionally, an Alaska LLC (99% owned by the DAPT and 1% owned by the settlor's son) held entities and real property located in Washington; the settlor's son, based in Washington, was the manager. Id. at 805. The case also featured fraud and bankruptcy issues. Id. at 809,811.
(143.) King, III, supra note 132; Karibjania, et al., supra note 131.
(144.) S.D.C.L. [section] 55-16-9 (2012 & Supp. 2016).
(145.) S.D.C.L. [section]55-16-13(2012).
(146.) NEV. REV. STAT. [section] 153.031.3 (2015).
(147.) ALASKA STAT. [section][section] 09.60.010 (a), 13.36.310 (2014).
(148.) S.D.C.L. [section]55-1-54(2016).
(149.) S.D.C.L. [section]22-25A (2016).
(150.) Stephen Murphy, The Tax Implications of Arbitration, TRUSTS & ESTATES (Aug. 2015).
(151.) Al King, III, Trusts without Beneficiaries--What's the Purpose?, TRUSTS & ESTATES. (Feb. 2, 2015); Alexander A. Bove, Jr., Rise of the Purpose Trust, TRUSTS & ESTATES (Aug. 1, 2005); Alexander A. Bove, Jr., The Purpose of Purpose Trusts, PROB. & PROP. (May/June 2004); Alexander A. Bove, Jr., Trusts Without Beneficiaries: Planning With Purpose Trusts, BOSTON BAR ASSOCIATION (Oct. 21, 2014), http://www.bostonbar.org/docs/default-document-library/trusts-without-beneficiaries-planning-with-purpose-trusts--boston-bar-association--october-21-2014D91F18460431.pdf?sfvrsn=2 (explaining that this article is in part excerpted in part from The Purpose of Purpose Trusts, in 2 ASSET PROTECTION STRATEGIES; PLANNING WITH DOMESTIC AND OFFSHORE ENTITIES (2005)).
(152.) S.D.C.L. [section] 55-1-20 (2008). For an example of a pet trust, see Leona Helmsley's infamous trusts including a trust for her dog "Trouble", moved from New York to South Dakota for further flexibility; the Helmsley trusts have donated millions back to South Dakota. See Cara Buckley, Cosseted Life and Secret End of a Millionaire Maltese, N.Y. TIMES (June 9, 2011); Stephen Lee, Pierre Man is Helmsley Heir Running $5.5 Billion Trust Working on Rural Health, Capital J. (May 14, 2015).
(153.) S.D.C.L. [section] 55-1-20 (2016) (specific statutory provision eliminating the RAP for a purpose trust statute was added in 2008). See generally Adam J. Hirsch, Trusts for Purposes: Policy, Ambiguity, and Anomaly in the Uniform Laws, 26 FLA. S. U. L. REV. VOL. 913, 939 (1999) (discussing whether the common law RAP may still apply to noncharitable purpose trust without beneficiaries without legislative intervention).
(154.) S.D.C.L. [section]55-1-20(2016).
(155.) King, III, supra note 151.
(156.) Al W. King, III, Are Irrevocable Trusts Truly Irrevocable?--Reformation, Modification, Decanting and Trust Protectors, Address at the Berks County Estate Planning Council (Mar. 16, 2016); Al W. King, III, Are Irrevocable Trusts Truly Irrevocable?--Reformation, Modification, Decanting and Trust Protectors, Inland Empire Estate Planning Seminar (Nov. 6, 2013); Al W. King, III, Are Irrevocable Trusts Truly Irrevocable?--Reformation, Modification, Decanting and Trust Protectors, Southern Nevada Estate Planning Council (Mar. 1, 2013); Mary Akkerman, Decanting: A Practical Roadmap for Modernizing Trusts in South Dakota, 61 S.D. L. REV. 413 (2016).
(157.) See generally In re Peierls Family Inter Vivos Trusts, 59 A.3d 471 (Del. Ch. 2012), aff'd in part, rev'd in part, 11 A.3d 249 (Del. 2013) (whether Delaware law applied for administration and approval of trust modification); In re Ethel F. Peierls Charitable Lead Unitrust, 59 A.3d 464 (Del. Ch. 2012) (whether Delaware law applied for administration and approval of trust modification); In re Peierls Charitable Lead Unitrust, 77 A.3d 232 (Del. 2013) (whether Delaware law applied for administration and approval of trust modification); In re Peierls Family Testamentary Trusts, 58 A.3d 985 (Del. Ch. 2012), aff'd in part, rev'd in part, 77 A.3d 223 (Del. 2013) (whether Delaware law applied for modification of existing trust). Related cases where the courts denied modification because governing instrument provided for New York law to govern and thus, appointment of Delaware successor trustee alone was insufficient to override settlor's intent. See also In re Trust Under Will of Flint for the Benefit of Shadek, 118 A.3d 182, 193 (Del. Ch. 2015) (rejecting an unopposed petition by income beneficiary of a trust to modify its administrative terms to allow for investment advisor and a directed trustee as it would contradict settlor's intent despite arguments that the beneficiaries may be better served by the directed trust). Please note the directed trust laws were not in place at the time the trusts were executed.
(158.) Bove, supra note 43.
(159.) CHARLES E. ROUNDS, JR. & CHARLES E. ROUNDS, III, LORING AND ROUNDS: A TRUSTEE'S HANDBOOK 1034 (2013 ed.).
(160.) S.D.C.L. [section] 55-3-26 (2012). Based on the authors' and their clients' experience, if all beneficiaries consent to reformation/modification, the court process can take as little as two hours to two weeks in South Dakota.
(161.) Email from Court Administration to Author (Dec. 20, 2012) (on file with author). The email reads:
Good afternoon. For those attorneys who handle trusts and estates, the Court has noticed a dramatic increase in the number of trust filings in recent days. We suspect this might have something to do with the still-unresolved tax and fiscal issues in Washington. Whatever the cause, we've assigned extra staff to process trust filings as we get closer to December 31. Judge [omitted] has also graciously offered to make himself available to sign trust and other related filings through December 31. Judge [omitted] email is attached below. Thank you.
Id. See also Email from Court Administration to Author (Dec. 20, 2012) (on file with author):
Because of the fluidity of the tax situation in Washington, several attorneys have clients who might need to make changes on trusts and other financial matters before January 1, 2013. Some attorneys have asked about my availability on December 31 if they need documents signed and filed. Please forward this to the Second Circuit Bar that I will be available until Midnight on New Years Eve if they need something signed and filed. I can sign a document and mark it filed with the court at that time even though the court house is closed. My home number is [xxx-xxxx (landline)].
(162.) S.D.C.L. [section] 55-3-26 (2012).
(163.) S.D.C.L. [section] 55-3-28 (2012 & Supp. 2016).
(165.) S.D.C.L [section]55-3-24 (2012).
(166.) Al W. King, III, Are Irrevocable Trusts Truly Irrevocable?--Reformation, Modification, Decanting and Trust Protectors, Address at the Berks County Estate Planning Council (Mar. 16, 2016). An example of changing a term could be for instance, a term stating one-third of principal at age twenty-five, one-third at age thirty, and one-third at age thirty-five, could be changed instead to a discretionary distribution for asset protection and other purposes.
(167.) See S.D.C.L. [section] 55-2-20 (2012); Treas. Reg. [section] 26.2601-1(b)(4)(i)(D)(1) (2016); I.R.S. Priv. Ltr. Rul. 200714016 (Apr. 6, 2007).
(168.) Thomas E. Simmons, Decanting and Its Alternatives: Remodeling and Revamping Irrevocable Trusts, 55 S.D. L. REV. 253, 263 (2010).
(169.) Examples of states that have enacted decanting statutes include, Alaska, Arizona, Colorado, Delaware, Florida, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, New Hampshire, Nevada , New Mexico, New York, North Carolina, Ohio, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia, Wisconsin and Wyoming. See generally Susan T. Bart, Decanting: Refining an Old Vintage Trust, Minnesota State Bar Association 2013 Probate & Trust Law Section Conference (June 2013). Please note South Dakota has had one of the top ranked decanting statutes since 2007. See Merric & Worthington, Which Situs is Best supra note 14; see also Rashad Wareh, Trust Remodeling, TRUSTS & ESTATES, 20-21 (Aug. 2007); Simmons, supra note 168; Rashad Wareh & Eric Dorsch, Decanting: A Statutory Cornucopia, TRUSTS & ESTATES, 24 (Mar. 2012).
(170.) S.D.C.L. [section] 55-2-15 (2012 & Supp. 2016).
(171.) S.D.C.L. [section]55-2-15(10).
(172.) S.D.C.L. [section]55-2-18.
(173.) Al W. King, III, Are Irrevocable Trusts Truly Irrevocable?--Reformation, Modification, Decanting and Trust Protectors, Address at the Berks County Estate Planning Council (Mar. 16, 2016).
(177.) Simmons, supra note 168, at 255.
(178.) King, III, supra note 156.
(179.) See Wareh & Dorsch, Decanting: A Statutory Cornucopia, supra note 169 (discussing decanting statutes).
(180.) S.D.C.L. [section] 21-22-28 (2004 & Supp. 2016) (confirming the automatic seal for privacy in any court proceeding concerning the trust).
(181.) DEL.CH.CT.R. 5.1 (West 2017).
(182.) S.D.C.L. [section]55-2-13(2012).
(183.) Al W. King, III, Should You Keep a Trust Quiet (Silent) From Beneficiaries?, TRUSTS & ESTATES (Apr. 2015).
(184.) ALASKA STAT. [section] 13.36.080(b) (2014).
(185.) S.D.C.L. [section] 55-2-13 (2012).
(186.) DEL. CODE ANN. TIT. 12 [section] 3303 (West 2017).
(187.) NEV. REV. STAT. [section] 163.004 (West 2017).
(188.) S.D.C.L. [section] 55-1B-l(10) (2012 & Supp. 2016).
(189.) S.D.C.L. [section] 55-1B-12.
(195.) Rev. Proc. 2016-55 (IRS RPR).
(196.) S.D.C.L. [section] 55-17-1 to -14 (2012 & Supp. 2016); ALASKA STAT. [section][section] 34.77 (West 2017); TENN. CODE ANN. [section] 35-17 (West 2017).
(197.) See Terry N. Prendergast, South Dakota Special Spousal Property Trusts: South Dakota "Steps-up" to the Plate and Hits a Home Run for Surviving Spouses, 61 S.D. L. REV. 431, 432 (2016) (discussing the newly enacted Special Spousal Property Trust legislation in South Dakota).
(198.) Please note that the IRS has not commented or ruled on the SST or Community Property Trust since the first statute was enacted in 1998. However, many advisors believe that the IRS will continue to recognize that state law defines what property is and the characteristic of marital property. Prendergast supra note 197. In either case, the clients will be no worse off than if they did not establish the SST, except for the minimal costs to establish the SST.
(199.) Al King, III, Tips from the Pros: Domestic Trust Situs Opportunities for International Families?, TRUSTS & ESTATES (Sept. 28, 2015), http://www.wealthmanagement.com/estate-planning/tips-pros-domestic-trust-situs-opportunities-international-families. See also, Al W. King III, The Top Ten Reasons International Families Establish U.S. Trusts--Why? How? Once a No-No, Now Commonplace, Fourth Annual STEP/UCLA School of Law Institute on Tax, Estate Planning and the Economy (Jan. 2015); Al W. King III, Popular Domestic Trust Strategies for International and Cross Boarder Families, Third Annual STEP/UCLA School of Law Institute on Tax, Estate Planning and the Economy (Jan. 2014); Mary Akkerman et al., Hot Topics: U.S. Trusts for Foreign Families, the New EU Succession Regulations and U.S. Expatriation Regulations, A.B.A Spring Symposia (May 2016). All of these sources provide more information on the history and advocacy done on behalf of South Dakota. Id.
(200.) S.D.C.L. [section] 55-16-15(5) (2012 & Supp. 2016).
(201.) Please note the United States is not a signatory to CRS, which is most foreign jurisdictions version of the United States Foreign Account Tax Compliance Act ("FATCA"); however, many foreign families are very concerned with privacy regarding their families and their assets under CRS. Specifically, CRS is the Organization for Economic Cooperation and Development's ("OECD") emerging global standard for the automatic exchange of financial account information. CRS is a set of global standards for the annual exchange of financial information by financial institutions to tax authorities of the jurisdictions in which customers are residents for tax purposes. Standard for Automatic Exchange of Financial Account Information in Tax Matters, OECD (2014). http://www.oecd-ilibrary.org/docserver/download/2314131e.pdf?expires=1490972062&id=id&accname=guest&checksum=3B1CC400899849442D231AB7EB07CBB2. CRS was inspired by the financial reporting requirements established by FATCA and currently has 100 jurisdictions committed. Global Forum on Transparency and Exchange of Information for Tax Purposes, AEOI: Status of Commitments, OECD (Mar. 30, 2017), http://www.oecd.org/tax/transparency/AEOI-commitments.pdf
(202.) G. Warren Whitaker, U.S. Tax Planning for Non-U.S. Persons and Trusts: An Introductory Outline, DAY PITNEY, LLP (2016 ed.).
(203.) I.R.C. [section][section] 2501(a)(3), [section] 2511(b) (2011 & Supp. 2016). See also Al King, III, Tips from the Pros: Domestic Trust Situs Opportunities for International Families?, TRUSTS & ESTATES (Sept. 28, 2015), http://www.wealthmanagement.com/estate-planning/tips-pros-domestic-trust-situs-opportunities-international-families.
(204.) See generally Al W. King III & Pierce H. McDowell III, Why South Dakota is such a Powerful Trust, Asset Protection and Tax Jurisdiction, 42th-49th Annual Heckerling Institute on Estate Planning Luncheon Seminars (2008-2016); Al W. King III & Pierce H. McDowell III, Why South Dakota, Twenty-third Annual Spring Symposium: American Bar Association (Mar. 2012); Pierce H. McDowell, III, Trust Forum Shopping: The Next Generation, TRUSTS & ESTATES, Aug. 1997, at 10; Al W. King III & Pierce H. McDowell III, Webinar: Why is South Dakota Such a Popular Trust, Tax & Asset Protection Jurisdiction?, NAPFA (Sept. 2014); Al W. King III, Powerful Estate Planning Opportunities Your Clients Should Be Aware of and How South Dakota Can Help, Notre Dame Tax & Estate Planning Institute (Sept. 2015): Al W King III. Selecting Modern Trust Structures Based Upon A Family's Assets, 52nd Annual Hawaii Tax Institute (Nov. 2015); Al W. King III, Factors in Selecting Domestic Trust Jurisdictions, A.B.A. (July 2007); Al W. King III, Dynasty Trusts, Sky Radio--TV Net Worth Interview, (June 2010); Al W. King III & Pierce H. McDowell III, Selection of Domestic Trust Jurisdictions, STEP Los Angeles (May 2006); Al W. King III, Why South Dakota is such a Powerful Trust, Asset Protection and Tax Jurisdiction, Tiger 21 (June 2016); Al W. King III, Selection of Domestic Trust Jurisdictions: Does it Make a Difference?, ALCPA Tax Strategies for the High-Income Individual (May 2008); Zachary R Mider, Moguls Rent South Dakota Addresses to Dodge Taxes Forever, BLOOMBERG (Dec. 26, 2013, 11:01 PM), http://www.bloomberg.com/ news/articles/2013-12-27/moguls-rent-soufh-dakota-addresses-to-dodge-taxes-forever; South Dakota Trust Association, The South Dakota Story, PR1V. WEALTH (June 17, 2016), http://www.fa-mag.com/news/the-soufh-dakota-story-27530.html; Kara Scannell & Vanessa Houlder, US tax havens: The new Switzerland, FIN. TIMES (May 8, 2016), https://www.ft.com/content/cc46c644-12dd-11e6-839f-2922947098f0.
(205.) South Dakota's main industries are banking and health care, unlike its competitor states Alaska (oil, tourism), Delaware (aircraft, healthcare, financial), Nevada (gaming, tourism), and Wyoming (mining). Additionally, South Dakota is the only state with: a fully-funded pension; a balanced budget since 1889; a state debt (adjusted for pension and other post-employment benefits) of 3.1% of GDP; and the lowest unemployment rate in the country as of June 2016 at 2.7%.
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|Author:||King, Al W., III; McDowell, Pierce H., III|
|Publication:||South Dakota Law Review|
|Date:||Jun 22, 2017|
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