Trusts owe taxes and are subject to tax rates established at the federal, state, and local levels.
South Dakota remains one of the most favorable jurisdictions for establishing trusts, particularly because it does not impose state income tax on trust income. This unique tax advantage means that more of the trust's earnings can be retained and reinvested, growing the trust's assets more efficiently over time.
No State Income Tax
South Dakota does not have an income tax and, therefore, does not tax retained income in trusts. Therefore, there is a simple and compelling tax planning opportunity by properly situsing a trust in South Dakota.
Since South Dakota is one of seven states with no personal income tax, FICA and federal income taxes are the only concern for workers here. The lack of income taxes means more money in your pocket throughout the year. When we talk about FICA taxes, the two factors at play are Social Security and Medicare taxes.
South Dakota does not have an inheritance tax. The voters of South Dakota repealed the state inheritance tax effective July 1, 2001. There is also no estate tax.
Some goods are exempt from sales tax under South Dakota law. Examples include gasoline, purchases made with food stamps, and prescription drugs.
With a trust, there is no automatic judicial review. While this speeds up the process for beneficiaries, it also increases the risk of mismanagement. Trustees may not always act in the best interests of beneficiaries, and without court oversight, beneficiaries must take legal action if they suspect wrongdoing.
South Dakota trust laws are set-forth in Fiduciaries and Trusts, South Dakota Codified Laws. Trust Period South Dakota has abolished the rule against perpetuities, and trusts can be of unlimited duration. Properly structured, assets can pass from generation to generation.
Alaska, Nevada, and Delaware are all top jurisdictions for self-settled trusts.
Some trusts can also help reduce estate taxes. Most trusts avoid probate. Varying tax rules apply to beneficiaries depending on whether the trust is revocable or irrevocable and the type of income the beneficiary receives.
Unlike federal capital gains taxes, there is no capital gains tax in South Dakota. In other words, there is not a state-level tax imposed on capital gains earned by individuals, businesses, or other legal entities.
You create a living trust during your lifetime by signing a trust agreement which is a legal document that directs how property transferred to the trust will be managed, when and to whom the income and principal from the trust will be paid, and to whom the trust property will be distributed when you die.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
Inheriting a trust comes with certain tax implications. The rules can be complex, but generally speaking, only the earnings of a trust are taxed, not the principal. A financial advisor can help you minimize inheritance tax by creating an estate plan for you and your family.
California is unique in that it first taxes a trust if the trust has a California trustee; if not, it then looks to the residence of the non-contingent beneficiaries. California tax on a trust's income can be reduced if a trust with some or all non-resident beneficiaries has a non-resident trustee.
South Dakota's trust laws provide a significant advantage in terms of flexibility and control. Even if your trust is irrevocable, you can make modifications. The state also allows for easy decanting (moving assets from one trust to another) for trust issues that cannot be resolved through non-judicial modification.
There are also some potential drawbacks to setting up a trust in California that you should be aware of. These include: When you set up a trust, you will have to pay the cost of preparation, which can be higher than the cost of preparing a will. Also, a trust doesn't provide special asset or estate tax protection.
South Dakota allows for a trust to exist in perpetuity, i.e., for an unlimited duration.
Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets. Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future.
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
Like most tax havens, South Dakota has no income tax, no inheritance tax and no capital gains tax. But the state has gone even further than that. South Dakota allows for extreme secrecy when law enforcement comes knocking, and protects assets from being claimed by creditors, ex-spouses, or pretty much anybody else.
Inheritances, gifts, cash rebates, alimony payments (for divorce decrees finalized after 2018), child support payments, most healthcare benefits, welfare payments, and money that is reimbursed from qualifying adoptions are deemed nontaxable by the IRS.
The state of South Dakota has a relatively simple property tax system. Tax rates, set by local government bodies such as municipalities and school districts, are applied to the full market value of residential property. Across the state, the average effective property tax rate is 1.08%.