All of these trends provide advisors and planners powerful opportunities in 2018, the following of which are outlined below:

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1 POWERFUL TRUST PLANNING OPPORTUNITIES AFTER TAX REFORM FOR 2018 AND BEYOND With the passage of the Tax Cuts and Jobs Act of 2017 (the Act ), planners will need to contemplate the extensive changes made by the Act including the doubling of the federal exemption amounts from $5.6m to $11.2m for the estate, gift and GST taxes as well as to plan for the sunset of the increased exemption amounts on December 31, 2025 (the exemption amounts will return to $5m indexed for inflation). Additionally, planners will need to continue to factor in the Federal Reserve trend to raise interest rates. Lastly, international families continue to establish trusts in the United States at a record pace, both with and without family members and/or assets in the United States. All of these trends provide advisors and planners powerful opportunities in 2018, the following of which are outlined below: Dynasty Trusts: o Establishing New Dynasty or GST Trusts o Additional Gifts to Existing Dynasty or GST Trusts o Modernizing Existing Dynasty or GST Trusts o Key Advantages: Directed Trust, Privacy, Beneficiary Quiet, Asset Protection, Etc. Additional strategies to utilize increased exemptions as well as other powerful planning structures: o Promissory Note Sale: With Life Insurance With Real Estate o Domestic Asset Protection Trusts ( DAPT ) o Private Placement Life Insurance o Non-Charitable Purpose Trusts without beneficiaries o Special Purpose Entities o Community Property Trusts (i.e., Special Spousal Trust) International Family Planning Private Family Trust Company South Dakota Trust Company LLC All Rights Reserved 1

2 DYNASTY OR GST TRUSTS - WHY FUND A TRUST? Establishing New Dynasty or GST Trusts: The Act doubled the estate, gift and GST tax exemptions to $11.2m per individual in 2018 ($22.4m per couple). As such, there has been no better time than now to consider funding a newly drafted South Dakota Dynasty Trust to take full advantage of the increased estate, gift and GST exemptions. In addition, utilizing the increased exemptions in 2018 and beyond will be critically important particularly with the increased exemptions set to sunset on December 31, 2025 or possibly sooner if the Democratic Party retains control of the White House/Congress. A Dynasty Trust saves both federal and state taxes in perpetuity even if exemption amounts are lowered in the future. In addition, a Dynasty Trust may freeze the value of trust assets at the date it is gifted into the Dynasty Trust; thereby, allowing for tax free growth. Typically, Dynasty Trusts are also designed to provide a substantial legacy for current and future generations and/or to promote family values in perpetuity; coupling such legacy planning with the historically high exemptions provides a powerful legacy vehicle for future generations. A Dynasty Trust saves both federal and state taxes in perpetuity even if exemption amounts are lowered in the future. Additional Gifts to Existing Dynasty or GST Trusts: For individuals who have previously funded a Dynasty Trust with all or partially all their exemption amounts, the Act will provide an additional $5.6m to contribute to their existing Dynasty Trust. This will be key as planners can utilize the historically high exemption amounts to save additional federal and state taxes in perpetuity even if the exemption amounts are lowered in the future. Modernize an Existing Dynasty or GST Trust: Consider making changes and additions to an existing Dynasty or GST Trust as a result of the increased gift and GST tax exemptions. By changing the situs of an existing Dynasty or GST Trust to South Dakota, estate planners can potentially save state income taxes and provide opportunity to reform/modify or decant the trust. State income tax implications will be more important than ever with the Act s limiting of the state and local income tax deduction. Typical methods to modify existing trusts are: Reformation/Modification is very inexpensive (averages $2,500) and quick (timing averages 2 hours to 2 weeks) in South Dakota. This would allow the trust to acquire the favorable laws South Dakota Trust Company LLC All Rights Reserved 2

3 of South Dakota, such as directed trusts, trust protectors, special purpose entities, privacy and asset protection, that may not be present in the existing Dynasty or GST Trust. Decanting would allow for a distribution from an existing trust sitused in a jurisdiction without all of the favorable trust laws to a newly drafted South Dakota trust. South Dakota has one of the top rated decanting statues in the country. Once an existing trust is reformed/modified or decanted, the client could then take advantage of their increased exemptions by adding to such a trust. Please note that the existing trust duration (i.e. RAP) cannot be extended. The following are typical key reasons to Reform/Modify or Decant: Old Distribution Standards (i.e. 33% at age 25, 33% at age 30, and 33% at age 35): Older trust distribution standards requiring principal distributions at various ages may no longer be desired. These old standards can generally be modified to a purely discretionary standard. The modern directed South Dakota trusts have family members controlling most of the distributions from the trust for health, education, maintenance, and support. Consequently, amending the trust to a purely discretionary standard versus required principal distributions at various ages may be desired. For instance, with the older distribution standards, once distributed, the principal is no longer asset protected and is subject to estate, GST, and income taxes. However, South Dakota has a very unique statute stating that a discretionary interest in a trust is not a property right, thus providing the ultimate asset protection. Thus, reforming/modifying a trust to a purely discretionary standard with a South Dakota trust could provide powerful asset protection and estate planning. Investment Flexibility: Many states like New York, California, Massachusetts, Connecticut, etc., are not directed trust states, like South Dakota, but are delegated trust states. Consequently, whether a family or an institutional trustee is involved, due diligence and ongoing monitoring of the trust assets are required in these delegated trust states. Many family member trustees are not in compliance and risk individual liability in the event of a future lawsuit by a beneficiary as a result of improper diversification, asset allocation, a bad investment or bad performance. Consequently, many people like to change trust situs and reform/modify or decant an existing delegated trust to a directed trust so that these issues do not exist. Additionally, a heavy concentration in one asset or asset class and/or a broad sophisticated Harvard or Yale endowment type asset allocation are generally not an issue with a directed trust, but can pose major issues for a delegated trust. South Dakota Trust Company LLC All Rights Reserved 3

4 Other key reasons to reform/modify: o o o o o o o o Change the governing law applicable to the trust Add flexibility regarding appointment of trustees and other fiduciaries Improve the trust s governance structure Modernize an outdated trust agreement Improve tax provisions Save state income taxes Add privacy Improve asset protection For more information, please see our Modernizing an Existing Irrevocable Trust: Reformation/Modification & Decanting publication. Key Advantages of a South Dakota Dynasty Trust: Directed Trust: Directed trusts have fast become one of the most powerful and popular tools in structuring modern trusts, offering far more flexibility, control and protection when compared to the delegated trust statutes that most states provide, and this trend is set to continue into With a directed trust, a family is offered the tools to tailor the trust to their needs with asset allocation, diversification, investment management, and distributions, all while significantly increasing liability protection. South Dakota is one of the few select states that has a directed trust statute; in fact, South Dakota has one of the oldest and highest rated directed trust statutes in the United States. Specifically, a directed trust allows individuals, who establish a trust with an administrative trustee in the directed trust state, to appoint a trust advisor or investment committee, who in turn can select an outside investment advisor(s) and/or manager(s) to manage the trust s investments. Multiple advisors may be chosen based upon different asset South Dakota has one of the first and highest rated directed trust statutes in the country classes/diversification. This allows a family to utilize and deploy a broad and sophisticated Harvard or Yale Endowment-type asset allocation, which they might not otherwise be able to do with most states delegated trust statutes, as a result of laws, risks, time and costs. Moreover, it allows the directed trust to hold both financial and non-financial assets (i.e. business interests, real estate, LLCs, FLPs, timberland, direct private equity etc.). South Dakota Trust Company LLC All Rights Reserved 4

5 Generally, many individuals choose to name their family, friends, or others they trust as cotrustees, thus subjecting them to a high personal liability standard. With a directed trust, these individuals may serve as investment/distribution committee members as fiduciaries resulting in significantly less exposure to personal fiduciary liability (i.e. generally a gross negligence/willful misconduct standard). Lastly, directed trusts generally result in lower the fees for trust administration since the monitoring and reporting responsibilities of the administrative trustee are lessened (these functions are usually performed by the investment committee), when compared with other types of trust administration such as delegated trusts. Privacy: South Dakota has a comprehensive privacy statute, i.e., automatic total seal forever for all trust matters involving court. No other state has this type of privacy protection. All other states keep trust matters public with few exceptions; the trend is public in most states. Asset Protection: All Dynasty Trusts generally have spendthrift protection from creditors, which provides powerful asset protection, and is available in all states for most all types of irrevocable trusts. As previously discussed, South Dakota like many of the other more popular Dynasty Trust states, has additional asset protection by statute that states that a discretionary interest, a power of appointment, and/or a remainder interest are not a property right. These Dynasty Trust states offer additional asset protection by statutorily defining the types of interest a beneficiary has in a trust and thereby the rights of the beneficiary s creditors. South Dakota is one of only a handful of states with this type of statute. This is an important supplement to spendthrift protection, because there have been situations where the spendthrift clause did not protect against a divorced in-law penetrating the trust for alimony. Very few states have this protection or have very limited versions of this protection. Thus, a South Dakota Dynasty Trust can provide powerful asset protection. Beneficiary Notice: Many families do not want the trust beneficiaries to know of the existence of a trust or the trust assets. Consequently, many state s statutes allow the grantor to modify the notice requirements or for the beneficiaries to waive notice. South Dakota allows for beneficiary waiver of notice, but also provides that the grantor, trust advisor or trust protector, by the terms of the governing instrument, the power to expand, restrict, eliminate, or otherwise modify the rights of beneficiaries to information relating to a trust. In addition, South Dakota South Dakota Trust Company LLC All Rights Reserved 5

6 does not have any time restriction to the waiver of notice nor does a trustee need to provide information to a beneficiary even after distributions have been made. No Income Tax State: The Act greatly minimizes the state and local income tax deductions; thereby, planners will need to be focusing on state tax reduction. South Dakota does not have an income tax, which allows a trust to grow free of state income taxation and minimizes the loss of the state and local income tax deductions. Many families do not want the trust beneficiaries to know of the existence of a trust or the trust assets. Low Premium Tax State: South Dakota s 8 basis point premium tax is one of the lowest in the U.S for both trust owned and LLC owned policies. The average U.S. premium tax is 200 basis points (i.e., 2%). New York, and New Jersey are 200 basis points; Florida is 175 basis points; Nevada is 350 basis points; and California is 235 basis points. As a result of the low premium tax, many advisors and grantors have utilized South Dakota in purchasing their insurance policies. Promoting Family Values Combining South Dakota s directed trust structure with a Dynasty Trust can be a powerful tool at promoting family values for generations by ensuring that senior family members can pass their values and goals on to younger generations. For instance, through trust incentive clauses, a senior family member can tie trust distributions to: W-2 income, earning an advanced degree or high academic grades, entering a particular profession or working for charity, avoiding substance abuse, staying married, remaining at home to care for young children or aging parents, etc. Such clauses can promote family values in perpetuity. These types of trust provisions generally work best with directed trusts and family distribution committees. For more information, please see our South Dakota Directed Trusts, Trust Protectors and Special Purpose Entities publication and Drafting Modern Trusts, December 2015, Trusts & Estates magazine. South Dakota Trust Company LLC All Rights Reserved 6

7 ADDITIONAL STRATEGIES TO UTILIZE INCREASED EXEMPTIONS AS WELL AS OTHER POWERFUL PLANNING OPPORTUNITIES PROMISSORY NOTE SALE: Consider planning with a promissory note sale to an income tax defective South Dakota Dynasty Trust to take advantage of the current low interest rate environment as well as the historically high exemption amounts. With the increased exemptions, a note of up to $100.8 million in post-discounted assets would be justified. Specifically, this strategy shifts future appreciation on the note assets that are sold to a South Dakota Dynasty Trust for the benefit of the client s descendants without any gift or GST costs. It is often seen in conjunction with direct private equity, closely-held stocks, pre-ipo stocks and publicly traded interests. These assets and the growth of these assets can then pass to future generations free of estate and GST taxes in perpetuity. Placing $11.2 million (even $1 million) into a new Dynasty Trust today can result in a substantial family bank promoting family values in perpetuity Generally, the principal payments on the promissory note would be deferred by using an interest-only promissory note with a single balloon payment at the end of the note term. Often, only non-voting, closely-held shares or partnership units are sold to the Dynasty Trust while the voting shares and the management, control and income related to the assets generally remain in the hands of the parents or grandparents. The grantor could also sell non-discountable assets to the trust (i.e., investments). If spouses take full advantage of their gift tax and generation skipping transfer tax exemptions, a Dynasty Trust can be funded with up to $22.4 million (i.e., $11.2 million per spouse). That amount would justify the eventual sale of up to $201.6 million (i.e., nine times the $22.4 million funding amount) in post-discounted assets to the Dynasty Trust without any gift or GST taxes and potentially, without any estate and income taxes. In addition, the future appreciation on the assets contained in the Dynasty Trust is transferred to the grantor s living and future descendants. South Dakota Trust Company LLC All Rights Reserved 7

8 Promissory Note Sale Example: Client/ Grantor Gift $11,200,000 Loan/Note $100,800,000 Post Discount* Tax Free Interest on Note (9 Yrs) $2,126,880 annually** $100,800,000 Note Repaid (9 Yrs) South Dakota Family Dynasty Trust Beneficiaries: -Children -Future Descendants Trust Value 9 Yrs $80,093,598 *** (assuming 3% growth) *Promissory Note Sale/Loan: Assuming discounted assets and/or a 30% discount, the pre-discount value of the assets lent/sold to the trust would be approximately $144,000,000. This based upon the premise that one can lend into the trust nine times the original funding amount (i.e., 9 x $11,200,000 = $100,800,000 post discount). **Interest: Based upon an assumed midterm Applicable Federal Rate (Jan. 2018) of 2.11%, an annual interest payment of $2,126,880 would be paid to the grantor for 9 years. This interest is generally federal and state tax free. Interest is generally paid from cash flow and if not sufficient then in-kind to private equity investor. ***Net Value of Dynasty Trust Assets: After the nine year term is over, the $11.2m, the growth on the $11.2m as well as the $100.8m note or notes all remain in the trust for grantor and/or grantor s family as beneficiaries. The grantor can then enter into another note or combination of notes of about $720.84m (9 x $72,643,344). Powerful! Promissory Note Strategy and Life Insurance: Further, the promissory note strategy can be utilized towards the purchase of large amounts of life insurance without need for crummy beneficiaries. Under this scenario, the difference (i.e., the arbitrage) between the promissory note asset cash flow and the IRS required interest payments to the grantor based upon the selected note term inures to the benefit of the trust gift and GST tax-free. This South Dakota Trust Company LLC All Rights Reserved 8

9 difference can be used to pay a life insurance premiums without using any of the trust principal. In the example above, this strategy could produce an insurance policy with a death benefit of $126,456,000, which can be purchased without any gift, estate or GST tax. For more information, please see our Promissory Note Sale publication, and Drafting Modern Trusts, December 2015 Trusts & Estates magazine. Promissory Note Strategy and Real Estate: Existing residential real estate can also be transferred into trusts as a powerful alternative to the Qualified Personal Residence Trust (QPRT). A promissory note sale of a primary or vacation home to a defective grantor trust by the grantor, coupled with a fair market value rent of the home by the grantor, will generally produce better transfer tax results than a QPRT for most families. Consequently, this is a popular Dynasty Trust strategy allowing the home to stay in the family in perpetuity, if desired. Contrast the QPRT which is not a generation skipping transfer tax trust. Additionally, the grantor may get the home back outside of the trust at some point in the future with the promissory note sale strategy, if desired, which is not the case with a QPRT. Alternatively, many Dynasty Trusts are purchasing newly acquired residential real estate with trust funds as a trust asset for children and grandchildren to live tax free and asset protected. LLCs are generally utilized to facilitate the administration and operation of the real estate. These types of real estate strategies with trusts are both enormously popular. For more information, please see our Trust Planning: Residential Real Estate & Vacation Homes publication and Trust Options for Residential Real Estate, August 2015, Trusts & Estates magazine. South Dakota Trust Company LLC All Rights Reserved 9

10 Domestic Asset Protection Trusts (DAPT): As a result of the litigious society in which we live, many families are looking to improve their asset protection planning. Trusts generally provide excellent asset protection and wealth preservation. 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 or settlor is a permissible beneficiary. Not all states allow for self-settled trusts. South Dakota is one of the more popular self-settled trust states in the U.S. If properly structured, creditors cannot reach the assets in a selfsettled trust to satisfy the settlor s legal obligations. 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 the ability to establish a self-settled South Dakota DAPTs are quite popular, and can provide four unparalleled levels of asset protection trust even though that individual s gift and generation skipping tax exemptions have been fully utilized. The DAPT is generally structured as a self-settled tax neutral trust included in the estate combined with the dynasty trust as a third party trust excluded from the estate. Alternatively, the Dynasty Trust may also be established as a self-settled trust excluded from the estate. Often such a structure will be a third-party Dynasty Trust providing the Trust Protector the power to add a beneficiary from a class of individuals which includes the grantor. Such a structure could provide a powerful planning tool to take advantage of the historically high exemptions while providing a safety measure for the grantor in case trust assets are needed down the road as well as offering the flexibility to return assets to the Grantor s estate if it is later determined that the estate tax will not be an issue, and instead, a step-up in basis would be of greater benefit. Establishing a tax neutral DAPT in a state like South Dakota to supplement the Dynasty Trust is not only advantageous (i.e. provides four levels of asset protection), but also easy and inexpensive ($1,500 - $2,500 set-up and $4,000 - $5,000 flat annual trustee fee). Offshore asset protection has lost momentum as a result of increased scrutiny and reporting requirements by the United States government (i.e., mainly FATCA & FBAR). Consequently, South Dakota DAPTs are quite popular, and can provide significant advantages for asset protection. Generally, the settlor would place 10% to 40% of their financial assets into a DAPT to protect those assets from a possible future lawsuit. The settlor is a permissible discretionary beneficiary of the DAPT, but does not generally use the trust for everyday living expenses, as this may weaken the asset protection as well as result in other possible issues. South Dakota Trust Company LLC All Rights Reserved 10

11 The four levels of asset protection that South Dakota DAPTs provide make SD one of the more popular and beneficial jurisdictions for DAPTs. Please note these four levels of protection apply to both the tax neutral DAPT as well as the DAPT dynasty trust and are listed below: Level 1 Trust (i.e. self-settled statute) SOUTH DAKOTA DOMESTIC ASSET 2 year fraudulent conveyance standard Most states 4 years Prove transfer hinder, delay or defraud Specific creditor Clear & convincing burden of proof PROTECTION TRUST Level 2 SD LLC Charging Order Protection as Sole and Exclusive Remedy Plus Other Unique Advantages: Also sole member LLC statute Automatic Privacy: Varies by state Trend is public (SD automatic total seal in perpetuity; Delaware seal for 3 years, other states case by case) Attorney fees: Reimburse trustee if trust is sued and trust prevails (Delaware and South Dakota) Beneficiary quiet: Keeping a trust quiet from beneficiaries (SD, DE, AK), even after grantor s death or disability, and not limited to a time period i.e. perpetual (only in SD) South Dakota pre-1983 RAP statute (Murphy case): Adds strength to DAPT dynasty trust vs. possible issues with non-murphy case states Level 3 Discretionary Interest Protection Not a property or enforceable right 4 levels of protection unique to South Dakota Level 4 Spendthrift Provision For more information, please see our The South Dakota Wealth Preservation/Asset Protection Advantage for 2018 & Beyond publication and Defend Against Attacks on DAPTs, Trusts & Estates magazine, October Private Placement Life Insurance: The current high state income tax environment coupled with South Dakota s low premium tax have popularized Private Placement Life Insurance (PPLI), with the trend likely to continue in 2018, particularly with reduction of the state and local income tax deduction by the Act as well as the the South Dakota Trust Company LLC All Rights Reserved 11

12 way PPLI is now cost effectively priced. Additionally, many clients prefer not to deal with FBAR and FATCA reporting which is required by offshore policies. Consequently, they turn to domestic PPLI policies in South Dakota, due to South Dakota s low premium tax and other advantages. South Dakota s insurance premium tax at 8 basis points (8/100th of 1%) makes it the lowest in the nation for LLCs and one of the lowest for trusts (the national average is 200 basis points or 2%). Further, South Dakota has excellent and favorable insurance laws to go along with its nation low insurance premium tax. For example, South Dakota allows for in-kind distributions from both cash value distributions as well as death benefit payments; this helps with hedge fund lock-ups, etc. Also, South Dakota is the only state that allows for in-kind premiums and has an excellent insurable interest statute. And South Dakota s favorable insurable interest statutes also extends to LLCs. Hence, many of these advantages make South Dakota the jurisdiction of choice for PPLI. Generally, advisors utilize Private Placement Life Insurance for both newly formed trusts and entities, as well as with existing trusts. Alaska Arizona California Connecticut Delaware Florida Georgia Hawaii Illinois Massachusetts Minnesota Nevada New Hampshire New Jersey New York North Dakota Ohio Pennsylvania South Dakota Washington Wyoming 8 bpts. 200 bpts. 235 bpts. 175 bpts. 0 bpts. for Trusts; 200 bpts. for LLCs 175 bpts. 225 bpts. 275 bpts. 50 bpts. 200 bpts. 200 bpts. 350 bpts. 125 bpts. 210 bpts. 200 bpts. 200 bpts. 140 bpts. 200 bpts. 8 bpts. 200 bpts. 75 bpts. WAYS TO TAKE ADVANTAGE OF SOUTH DAKOTA S LOWEST PREMIUM TAX: 1. Establish South Dakota trust with South Dakota trustee (i.e., ) Purchase policy [or] 2. Establish a South Dakota LLC with SD LLC agent (i.e., ) Purchase policy WHAT IF EXISTING TRUST WITH SITUS OUTSIDE OF SOUTH DAKOTA?: 1. Set up a South Dakota LLC with South Dakota LLC agent (i.e., ) to purchase the policy [and] 2. Allocate SD LLC units to trust with situs outside of South Dakota South Dakota Trust Company LLC All Rights Reserved 12

13 PPLI is generally a universal life insurance policy; however, unlike regular life insurance, it is often designed to maximize savings and minimize the death benefit. Further, PPLI policies are now designed to be very cost efficient. Additionally, PPLI cash values generally may be directed by client s chosen investment advisor, and cash values accumulate income and capital gain tax free. And the investment advisor may be substituted for another advisor in the future. Furthermore, PPLI cash values are available tax free, using withdrawals of cost basis (total premiums paid) and very low cost loans. At the insured s death, the death benefit is payable tax free. Therefore all investment gains, dividends and interest are compounded without income tax. Assuming any reasonable lifetime investment return, the costs of the PPLI will be much less than the taxes that otherwise would have been paid. The PPLI cash values are as liquid as the underlying investments. Additionally, the cash values are generally in a separate account and are not subject to the general creditors of the life insurance company. Consequently, South Dakota s low state premium taxes, combined with its favorable insurance laws, have resulted in a dramatic increase in the administration by South Dakota Trust Company of large domestic Private Placement Life Insurance policies via insurance trusts and LLCs. PPLI has become a very powerful planning strategy for For more information, please see our South Dakota Premium Tax Planning publication and State Premium Tax Planning, June 2011, Trusts & Estates magazine. Non-Charitable Purpose Trust without Beneficiaries (To Preserve an Asset): Non-charitable purpose trusts ( purpose trust ) are one of the most overlooked vehicles for estateplanning purposes. These trusts can provide a helpful supplement to a grantor s estate planning to protect, in perpetuity, assets near and dear to the family. 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. Some of the common purposes for establishing a purpose trust are: Pet care (including offspring); Maintenance of grave sites (honorary trusts). Also, support of religious gravesite ceremonies; South Dakota Trust Company LLC All Rights Reserved 13

14 Maintenance of family property (for example, antiques, cars, jewelry and memorabilia); 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. South Dakota has one of the broadest dynasty purpose trust statutes in the U.S. In fact, 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. 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 South Dakota has one of the broadest dynasty purpose trust statutes in the U.S. statute. Consequently, a South Dakota purpose trust can last in perpetuity if desired. 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. Community Property Trust (For Clients in Non-Community Property States with Joint Property): South Dakota allows clients from across the country to establish a South Dakota Special Spousal Trust i.e. Community Property Trust ( SST ). South Dakota is one of only three states to allow individuals to opt-in to community property laws via trust. The SST is a powerful planning vehicle as it allows spouses to elect assets held by the SST to be treated as community property under IRC Section 1014(b)(6); thereby allowing for a 100% step-up in basis 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. South Dakota Trust Company LLC All Rights Reserved 14

15 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 2 and one-half at the fair market value of $10,000,000 divided by 2). 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, then 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 of resulted without the full step-up in basis). Consequently, marketable securities with a low cost basis are generally an ideal asset for an SST. Though other asset types may be placed into the SST, including real estate. However, please note that for out of state real estate, it is recommended that the property is owned by an LLC, so that the real estate may be deemed personal property. This is important to assure that South Dakota law governs and not the state where the real estate is located. The South Dakota Special Spousal Trust provides clients a powerful planning strategy for 2018, particularly for spouses with low cost basis investment assets, all while integrating South Dakota s top rated tax, asset protection and privacy laws. For more information on South Dakota s unique Special Spousal Trust, please see our publication entitled South Dakota s Special Spousal Trust/Community Property Trust Income Tax Planning Opportunity. Special Purpose Entities: Special Purpose Entities (SPEs) are also gaining enormous popularity; however, only a few states currently allow for these types of entities. South Dakota had the first statute to recognize these entities and is one of only two states that recognize these entities by statute, which has established South Dakota as one of the more popular states for Special Purpose Entities. Special Purpose Entities are South Dakota LLCs or some other form of corporation that houses South Dakota Trust Company LLC All Rights Reserved 15

16 the trust protector, as well as, the investment and distribution committees or advisors of a directed trust. The sole purpose of the Special Purpose Entity is to direct the administrative trustee as to the trust investments, distributions and trust protector functions. Please see below an example of the typical SPE structure: Special Purpose Entity (South Dakota LLC) Trust Protector Investment Committee Distribution Committee Not a Trust Company D&O, E&O Insurance Unique South Dakota Statute More ties to South Dakota Situs Directs South Dakota Trust Company Administrative Trustee The Special Purpose Entity alternative must generally be used in combination with the "directed trust" structure previously discussed. The Special Purpose Entities places a liability umbrella over the heads of the individuals filling the roles of trust protector, investment committee and/or distribution committee. These individuals are, in turn, agents or employees of the Special Purpose Entity, which is a South Dakota LLC thus further tying them to South Dakota situs. Additionally, SPE Board of Managers meetings are generally held outside of a family s resident state. Further, it is very difficult, if not improbable, to acquire liability insurance coverage for individuals serving on the investment or distribution committee or as trust protector of a directed trust. However, they are generally subject to a relatively low liability standard (i.e., gross negligence/willful misconduct) with most directed trusts. Some insurance companies, however, will provide D&O and E&O insurance coverage on a case by case basis to a Special Purpose Entity, thus further protecting the trust protector as well as the investment and distribution committee members. South Dakota Trust Company LLC All Rights Reserved 16

17 Such an entity would also provide legal continuity of its corporate existence by continuing without regard to any single individual's death, disability or resignation. Consequently, SPEs are great vehicles to perpetuate family governance. An SPE can serve all of the trusts for a particular family and thus a separate SPE is not needed for each family trust. Again, SPEs are not Private Family Trust Companies and cannot hold themselves out as such. The SPE typically has specific by-laws and allows for additional members to be added or removed so that the SPE can continue along with the trust. However, please note these entities have to be properly structured to avoid estate tax inclusion issues. In conclusion, these entities have limited defined duties regarding the investment management and distributions of the trust, as well as trust protector functions and they must work in conjunction with a qualified South Dakota directed administrative trustee (i.e., ). For more information, please see our Special Purpose Entity publication. INTERNATIONAL PLANNING: International families are establishing trusts in the United States at a record pace. In fact, 15% of South Dakota Trust Company s ( ) business is with international families. 15% of South Dakota Trust Company s ( ) business is with international families. For example, many international families are now establishing foreign grantor and non-grantor trusts with U.S. trustees, such as, to provide the ultimate protection for their assets. These foreign grantor trusts typically hold offshore assets in offshore entities (i.e., British Virgin Island companies). Additionally, if there are no U.S. assets, there is no U.S. taxation, but they still retain all the benefits of a U.S. trustee including the fact that the U.S. is not a blacklisted trust jurisdiction and is a stable trust situs for international families. Some of the more specific and common reasons why international families are looking for U.S. trust situs and a U.S. trustee include: Improved U.S. trust and tax laws Blacklisting of offshore jurisdictions by resident country Political stability/protection of real estate from resident country Secrecy wall falling apart globally Ownership in residential and/or commercial property in the U.S. Purchasing U.S. life insurance South Dakota Trust Company LLC All Rights Reserved 17

18 Family members in the U.S. Marriage by a U.S. citizen to a non-u.s. resident Foreign resident coming to the U.S. to work or live Some of the popular domestic trust planning options for international families are: South Dakota Foreign Grantor/Non-Grantor Trust with as the U.S. Trustee South Dakota Non-Resident Alien (NRA) Domestic Dynasty Trust South Dakota Stand-By Domestic Dynasty Trust Change of Situs, Foreign Trust to a South Dakota Trust South Dakota Pre-Immigration Domestic Trust Qualified Domestic Trust (QDOT) South Dakota Private Family Trust Company For more information, please see our South Dakota as a Situs for International & Cross Border Families publication, and Domestic Trust Situs Opportunities for International Families October 2015, Trusts & Estates magazine. PRIVATE FAMILY TRUST COMPANY: The popularity of Private Family Trust Company s (PFTC) has greatly increased since the late 1990 s, and that trend continues into South Dakota s PFTC laws are considered one of the nations best for regulated trust companies, while Wyoming is considered one of the nations best for unregulated trust companies. South Dakota Trust Company is an industry leader assisting families with the establishment, operation and compliance aspects of both South Dakota regulated and Wyoming unregulated PFTCs. Generally, the PFTC is a LLC that qualifies under state laws to be a trust company. It is owned and operated by the family and provides fiduciary and wealth management services to that family. Traditionally, families have chosen as their trustees: family members, advisors and/or commercial trustees with whom they have had personal, professional or business relationships with over the years. PFTCs allow them to still involve these family members, advisors and institutions in similar functions while serving the PFTC. The PFTC is also a way for family members to dramatically reduce their personal liability versus serving as trustees in an individual capacity. Typically the PFTC is located in a state with favorable trust, asset protection, tax and PFTC laws (i.e., South Dakota). These PFTCs generally enter into service agreements with the single family office (SFO) generally in another state. Alternatively, the SFO could also become a subsidiary of the PFTC or combined. In addition to the ease of creating and maintaining a South Dakota PFTC, there are several other compelling reasons to establish a regulated South Dakota PFTC; some of which are listed below: South Dakota Trust Company LLC All Rights Reserved 18

19 Exemption from SEC registration, since the PFTC is audited by banking division within the PFTC state 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 99 investors Liability protection (family acts as trustee with a LLC/PFTC entity owned by family with directors and officers insurance protection versus family members serving individually as trustees with personal liability) Planning opportunities for deducting trust investment fees in light of the Knight case and Treas Reg (d) (final regulations issued 5/9/14; previously IRS Notice ) The final IRS rules requires that investment fees be separated out from the overall trustee fee and subject to the 2% Adjusted Gross Income limitation Please note with the passage of the Act, unclear if deduction will still be applicable PFTC s provide a resolution of successor trustee issues Convenience and accessibility Efficient controls overhead and provides economies of scale Improved family governance with LLC/PFTC structure Enhanced ability to properly administer and operate illiquid family assets in trust (i.e. LLCs, FLPs, real estate, oil and gas, etc.) Allows for holding large concentrations of stock both public and/or private assets Allows for extensive flexibility with asset allocations Privacy IRS ruled if properly established, the PFTC will not be subject to estate tax inclusion (I.R.S. Notice , PLR , PLR , PLR ) PFTCs allow for better informed trust distribution and investment decisions Enables families to efficiently work with their own Family Office and all outside product advisors (i.e., investment, insurance, etc.) South Dakota Trust Company LLC All Rights Reserved 19

20 Broad powers a PFTC is 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 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 Unregulated PFTCs can provide many of the same benefits of a regulated PFTC (e.g., increased privacy regarding trust matters, efficient family governance, liability protection, successor trustee resolution, flexibility in asset concentration and diversification, etc.) while also providing certain advantages over a regulated PFTC. For example, unregulated trust companies generally can provide regulatory simplicity and increased privacy. Furthermore, an unregulated PFTC does not have capital requirements, is not subject to state audits, does not need a charter, as well as provides greater flexibility in governance, a shorter formation timeline and increased cost savings in both establishment and operations. The question of whether to establish a regulated or an unregulated trust company is an important one. For more information, please see our Private Family Trust Company publications and Wyoming Unregulated Private Family Trust Companies Regulated Expertise for the Unregulated, and The Private Family Trust Company and Powerful Alternatives February 2016, Trusts & Estates magazine. CONCLUSION: South Dakota s favorable tax, trust and asset protection laws make it one of the top trust jurisdictions in the U.S. Please note, the January 2018 issue of Trusts & Estates magazine ranks South Dakota #1 in all categories. In fact, it is the only state that ranked #1 across all categories (i.e., tax, trust laws, private trust companies, premium taxes and asset protection). Consequently, these favorable laws combined with s experience make South Dakota the jurisdiction of choice for many wealthy families. South Dakota Trust Company LLC All Rights Reserved 20

21 ÂfxÜä Çz YtÅ Ä xá Ç cxüñxàâ àçê Photo courtesy of the South Dakota Department of Tourism South Dakota Trust Company LLC 201 S. Phillips Avenue Suite 200 Sioux Falls, South Dakota Pierce McDowell (605) South Dakota Planning Company 10 East 40 th Street Suite 1900 New York, New York Al King (212) Trust accounts representing more than $50 billion in assets under administration No products of any kind purely trust administration services Work with all outside investment managers and custodians of the clients choice globally Work with most types of non-financial assets (both onshore and offshore) Excellent, timely and inexpensive reformation/modification and decanting statutes and processes Currently work with over 85 billionaire and 200 centa-millionaire clients 15% of clients are international families Private Family Trust Company (PFTC) relationships worth in excess of $82 billion ( Both Regulated and Unregulated PFTCs offered (WY office) 250 combined years of experience Highest ranked jurisdiction in the United States: #1 in all categories (January 2018) PRIVATEFAMILYTRUSTCOMPANY.COM DIRECTEDTRUST.COM For additional information on this or any topic, please contact us: Sioux Falls Office South Dakota Trust Company LLC 201 South Phillips Ave, Suite 200 Sioux Falls, SD Phone (605) Fax (605) Rapid City Office South Dakota Trust Company LLC 4020 Jackson Blvd, Suite 3 Rapid City, SD Phone (605) Fax (605) Wyoming Office Services of Wyoming LLC 890 W Broadway Jackson Hole, WY Phone (307) New York Office South Dakota Planning Co. 10 East 40 th Street, Suite 1900 New York, NY Phone (212) Fax (212) Westport Office South Dakota Planning Co. 274 Riverside Avenue 2 nd Floor Westport, CT Phone (203) IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, please note that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter addressed herein. South Dakota Trust Company LLC All Rights Reserved 21