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Trust Law/Level VIII · Trusts of the world/8.1 Common-law systems/Lesson 5

Trust-friendly states: Nevada, South Dakota, Delaware, Alaska

How Nevada, South Dakota, Delaware and Alaska compete for trust business through tax, duration, asset protection and administration rules, and why critics object.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. A non-grantor trust with its trustee in Alaska, Nevada or South Dakota pays no state income tax there, as those states have no personal income tax. Catch: home states may still tax it; California looks to resident fiduciaries and noncontingent beneficiaries (R&TC §§17742-17745).
  2. New York exempts a resident trust with no New York trustee, no New York property and no New York-source income (Tax Law §605(b)(3)(D)). Catch: accumulated income later distributed to a New York-resident beneficiary is generally taxed to that beneficiary, reported on Form IT-205-J.
  3. Incomplete-gift non-grantor trusts in no-tax states no longer shift tax for every settlor: New York taxes resident grantors on them (Tax Law §612(b)(41)), and California taxes grantors from 1 January 2023 unless the trust elects resident non-grantor treatment. Catch: check the settlor’s home-state rule first.
  4. Nevada’s asset protection trust generally bars an existing creditor who does not sue within 2 years of the transfer, or 6 months after discovery (NRS 166.170). Catch: 11 U.S.C. §548(e) reaches self-settled transfers within 10 years made with actual intent to hinder, delay or defraud.
  5. Quiet and directed trusts cut exposure and fees: Delaware and South Dakota let terms limit a beneficiary’s information for a period (12 Del. C. §3303(c); SDCL 55-2-13) and split investment from administration (§3313; SDCL ch. 55-1B). Catch: IRS returns and beneficiaries’ K-1s still apply.

MaterialsNevada Revised Statutes chapter 166 (spendthrift trusts) and §111.1031 (rule against perpetuities), free on the Nevada Legislature websiteSouth Dakota Codified Laws §43-5-8, chapter 55-1B and §55-2-13, free on sdlegislature.govICIJ and The Washington Post, ‘Suspect foreign money flows into booming American tax havens on promise of eternal secrecy’ (Pandora Papers, 4 October 2021)

Wonder

  1. Why would a family that lives in one state use the trust law of another?
  2. Which features do trust-friendly states compete on, and where do they differ?
  3. Why have journalists and critics questioned South Dakota’s trust industry?

Explore

  1. Several US states compete to attract trusts. Practitioners most often name Nevada, South Dakota, Delaware and Alaska, and Wyoming, Tennessee and New Hampshire are also frequently cited. A trust can often use a state’s law by naming a trustee there or administering the trust there, so the family need not live in that state (lesson 8.1.7). States compete mainly on state income tax, how long a trust may last, protection from creditors, flexible administration (directed trusts, decanting and quiet trusts) and trust company rules. This lesson compares these features neutrally and does not recommend any state.
  2. Alaska, Nevada and South Dakota have no state personal income tax, so a trust taxed only there generally pays no state income tax. Delaware taxes resident trusts but allows a deduction for income set aside for future distribution to nonresident beneficiaries (30 Del. C. §1636). Whether another state can also tax a trust depends on that state’s own rules, which may look at where the settlor, trustee or beneficiaries live. In North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (2019), the US Supreme Court held that North Carolina could not tax a trust’s undistributed income based only on in-state beneficiaries who had received no distributions and had no right to demand them.
  3. On duration, South Dakota declared the common-law rule against perpetuities not in force (SDCL 43-5-8), and Alaska’s statute provides that the common-law rule does not apply there (AS 34.27.075). Nevada allows interests to vest within 365 years (NRS 111.1031). Delaware has abolished the rule for personal property held in trust, but real property held directly in a trust must generally be distributed after 110 years (25 Del. C. §503). States that follow the Uniform Statutory Rule Against Perpetuities instead use a 90-year wait-and-see period. Long duration matters mainly for trusts meant to last for generations (lesson 5.3.1).
  4. All four states have domestic asset protection trust (DAPT) statutes: Alaska and Delaware from 1997, Nevada from 1999 and South Dakota from 2005. Their terms differ. In Nevada, an existing creditor generally must sue within 2 years after the transfer, or 6 months after discovering it if later (NRS 166.170), and the statute is commonly described as naming no exception creditors. Delaware generally allows 4 years and lets certain support, divorce and pre-existing tort claims reach the trust (12 Del. C. §§3572-3573). A court may apply the law of a settlor’s home state instead, and 11 U.S.C. §548(e) can reach transfers to a self-settled trust made within 10 years with actual intent to hinder, delay or defraud creditors (lesson 6.1.6).
  5. Administration rules also differ. Delaware treats persons who, under the trust terms, direct or consent to a fiduciary’s investment, distribution or other decisions as ‘advisers’ and fiduciaries (12 Del. C. §3313); South Dakota has a chapter on trust advisors and protectors (SDCL ch. 55-1B). Decanting statutes, such as 12 Del. C. §3528 and SDCL 55-2-15, let a trustee with power to distribute appoint property to a second trust (lesson 8.3.5). ‘Quiet trust’ rules let the trust terms restrict a beneficiary’s right to be informed for a period (12 Del. C. §3303(c); SDCL 55-2-13). South Dakota also regulates public and private trust companies separately (SDCL 51A-6A-1).
  6. Critics say these features attract secrecy-seeking wealth. On 4 October 2021, the International Consortium of Investigative Journalists (ICIJ) and The Washington Post, reporting on the Pandora Papers, said they had identified 206 US-based trusts linked to 41 countries and holding more than $1 billion, including nearly 30 holding assets linked to people or companies accused of fraud, bribery or human rights abuses. They reported that assets in South Dakota trusts had more than quadrupled over the past decade to $360 billion. The reporting also said there was no evidence in the documents that the foreign clients had sheltered criminal proceeds. Industry figures defend the regime as lawful planning that brings jobs to the state.

Key facts

  • Alaska, Nevada and South Dakota have no state personal income tax; Delaware deducts trust income set aside for nonresident beneficiaries (30 Del. C. §1636).
  • South Dakota (SDCL 43-5-8) and Alaska (AS 34.27.075) do not apply the common-law rule against perpetuities; Nevada allows vesting within 365 years (NRS 111.1031).
  • Delaware abolished the rule against perpetuities for personal property in trust but requires real property held in trust to be distributed after 110 years (25 Del. C. §503).
  • Alaska and Delaware enacted the first DAPT statutes in 1997, Nevada followed in 1999 and South Dakota in 2005; 11 U.S.C. §548(e) can reach transfers made within 10 years with actual intent to hinder, delay or defraud.
  • Delaware (12 Del. C. §3313) and South Dakota (SDCL ch. 55-1B) have directed-trust statutes, and both let trust terms limit a beneficiary’s right to be informed for a period.
  • In October 2021, ICIJ and The Washington Post reported that assets in South Dakota trusts had more than quadrupled in a decade to $360 billion.

Exercise nine, six, three, one

9CollectList up to 9 features of state trust laws described in this lesson or in a state statute you are reading (some sources give fewer), such as an income tax rule, a perpetuities period, a creditor time limit or a notice rule.
6ClusterSort them into 6 categories: income tax, duration, asset protection, directed trusts and decanting, privacy, and trust companies.
3DistillReduce the 6 categories to 3 groups: features that affect tax, features that affect control of the trust, and features that affect who can see or reach the trust.
1CrystallizeWrite 1 sentence explaining, in your own words, why critics and supporters disagree about the trust laws of states such as South Dakota.

Fact check

Dates, figures and claims checked against the published sources listed below.

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