South Dakota Dynasty & Grantor Trusts

Standby South Dakota dynasty trusts

Standby South Dakota dynasty trust is empty at creation during life and the will transfers the property into the trust at death. This type of trust is an excellent strategy for foreign citizens who may have children that are U.S. beneficiaries. Typically grantor will have established foreign trusts in an off-shore jurisdiction. Upon the grantor’s death, the foreign trust pours over the trust assets to an existing Stand-by South Dakota Dynasty Trust. This strategy can help to avoid the income tax filing requirements of the U.S. beneficiaries during grantors lifetime as well as the U.S. income tax rules on accumulated income of a foreign trust.

South Dakota foreign grantor trusts

This type of trust for grantors who are not U.S. citizens is considered a foreign (or off-shore) entity whose non-U.S. assets are not subject to U.S. income tax while the grantor is living. Usually revocable, these trusts give grantors (and their spouses) the right to income and gains in their lifetime as foreign beneficiaries.

Benefits

• Foreign grantor trusts give citizens of countries with volatile or corrupt financial and political systems a stable alternative to safeguard their assets without being subject to U.S. tax treatment.
• A South Dakota statute protects grantors and beneficiaries from their own countries’ forced heir provisions.
• Off-shore private investment companies and other similar corporate entities can be used to fund the trust in order to avoid estate taxation.
• South Dakota-based foreign grantor trusts address tax haven blacklisting concerns with transparency.

Cautionary notes

• Any U.S.-based assets such as real estate ARE subject to U.S. taxes.
• Once the grantor dies and the trust passes to heirs, the assets are subject to U.S. tax laws.
• Proper planning is needed to weigh the pros and cons of domesticating the trust after the grantor’s death by transforming it into a South Dakota dynasty trust. Dependent factors to consider include trust size, proportion of U.S. and foreign beneficiaries, offshore versus on-shore trust costs and future U.S. tax climate.

South Dakota non-resident alien dynasty trusts

This type of dynasty trust is specifically designed for non-U.S. citizen residents whose current or future children, grandchildren or great-grandchildren hold or will attain U.S. citizenship or green-card status. To preserve wealth for successive generations with minimal tax impact, the non-resident alien transfers on-shore assets that are not subject to gift, estate or generation-skipping taxes. In many cases, grantors will fund the trust through a life insurance policy, enabling beneficiaries to enjoy distributions free of federal (and state) income taxes.

Benefits

• There is no limit to the amount of on-shore assets the non-resident alien can place in the trust.
• As long as the trust is based in South Dakota, no state income tax is assessed on the assets.
• This strategy protects the trust assets from future creditors.
• South Dakota allows trusts to continue in perpetuity, avoiding federal transfer taxes for generations.

Descriptions of trusts are intended to be informational and are not specific recommendations. Contact a trust officer at Sterling Trustees for more detailed information on what would be best suited to your circumstances.