South Dakota has established itself as one of the leading jurisdictions for domestic asset protection trusts. The state’s DAPT legislation is codified in SDCL Chapter 55-16, titled “Qualified Dispositions in Trust,” and provides a comprehensive framework for protecting assets from future creditors. South Dakota offers several attractive features including perpetual trust duration, a two-year statute of limitations, limited exception creditors, and strong conflict of laws provisions. Understanding the specific statutory requirements helps determine whether South Dakota is the appropriate jurisdiction for your asset protection planning.
South Dakota DAPT Statutory Framework
The basic requirements for a qualified disposition under South Dakota law are straightforward but must be followed precisely. Under SDCL 55-16-1, the trust must have a qualified South Dakota trustee. The trust must contain a clause selecting South Dakota governing law. The trust must be irrevocable and must include a spendthrift provision. The settlor cannot serve as trustee.
The qualified trustee requirements are detailed in SDCL 55-16-3 and 55-16-4. The trustee must be either an individual resident of South Dakota or a trust company licensed under South Dakota or federal law with its principal place of business in South Dakota. Additionally, some or all of the trust assets must be deposited in South Dakota, or physical evidence of the assets must be held within the state.
South Dakota law permits the settlor to retain significant powers without disqualifying the trust for asset protection. Under SDCL 55-16-2, the settlor may retain beneficial interests in income, an interest of up to five percent annually, income from grantor retained annuity trusts, grantor retained unitrusts, qualified personal residence trusts, and charitable remainder trusts, and the right to receive principal distributions at the trustee’s discretion or pursuant to an ascertainable standard. The settlor may also retain veto power over distributions, limited and testamentary powers of appointment, the power to remove and appoint trustees excluding related or subordinate persons, the ability to serve as a non-controlling member of a distribution committee, and the ability to serve as an investment advisor.
Statute of Limitations
The statute of limitations under SDCL 55-16-10 provides meaningful protection once the applicable period has passed. For creditors whose claims arise after a transfer to the trust, the creditor must bring an action within two years of the transfer. For pre-existing creditors, the limitations period is the later of two years after the transfer or six months after the transfer was discovered or could reasonably have been discovered.
South Dakota provides a discovery mechanism that creates certainty around when the lookback period ends. A Bill of Sale can be filed to start the discovery period running. For non-resident settlors, the filing is made in the county where the trustee maintains its principal place of business.
The standard of proof in South Dakota favors the trust. A creditor must prove fraudulent intent by clear and convincing evidence, which is a higher standard than the preponderance of evidence used in many other states. This elevated standard provides additional protection for properly structured trusts.
Exception Creditors
South Dakota takes a protective approach to exception creditors. Child support and alimony are not exception creditors unless they were awarded prior to the transfer to the DAPT. Divorcing spouses are not exception creditors for transfers made prior to the marriage. For transfers made after marriage involving marital property, notice must be given to the spouse, though this requirement does not apply to separate property.
Compared to other DAPT states, South Dakota is more protective on the exception creditor issue. Nevada has no exception creditors at all. Wyoming treats child support claims as exception creditors. Delaware includes the spouse at the time of transfer, pre-existing tort creditors, and child support or alimony as exception creditors. South Dakota falls in the middle of this spectrum but offers stronger protection than most jurisdictions.
Creditors can still challenge a transfer if it was made with the intent to defraud that specific creditor under SDCL 55-16-9. However, the creditor must prove this by clear and convincing evidence and remains subject to the statute of limitations discussed above.
Conflict of Laws Provisions
South Dakota has enacted strong conflict of laws provisions to protect its DAPTs from attack under other states’ laws. Under SDCL 55-16-15, the statute declares that its substantive provisions are “inseparably interwoven with substantive rights” created under the trust. The statute further states that applying another jurisdiction’s contrary laws would result in a “deprivation of legal rights” under South Dakota law. South Dakota courts have exclusive jurisdiction over actions against qualified dispositions.
The statute also addresses foreign judgments. Judgments from other jurisdictions are not enforceable in South Dakota where they conflict with South Dakota public policy. Foreign forced heirship claims and claims for legitim may not be asserted against a South Dakota DAPT.
These provisions matter because when courts must decide which state’s law applies to a dispute, public policy statements can influence the outcome. South Dakota has made its legislative intent clear through these provisions. While this does not guarantee protection in every circumstance, it strengthens the position of South Dakota DAPTs compared to trusts formed in states without such provisions.
Dynasty Trust Features
South Dakota permits trusts to last indefinitely. The state has abolished the rule against perpetuities for personal property trusts, allowing assets to remain protected across unlimited generations. This perpetual duration makes South Dakota attractive for families engaged in multi-generational wealth planning.
South Dakota has no state income tax. Trust income is not subject to state taxation if the trust qualifies as a South Dakota trust. For trusts holding appreciating assets over long time horizons, these tax savings can be substantial.
The state also offers robust directed trust provisions under SDCL 55-1B. These statutes allow separation of investment and distribution duties. Trust advisors can direct investments while a distribution trustee handles beneficiary matters. This provides flexibility in structuring trust administration to meet family needs.
South Dakota’s decanting statutes under SDCL 55-2-15 through 55-2-21 provide broad powers to modify trust terms. Assets can be moved to a new trust with modified provisions, allowing families to adapt their planning as circumstances change over time.
South Dakota vs. Wyoming Comparison
Both South Dakota and Wyoming offer strong DAPT protection, but the states differ in ways that may matter depending on your priorities.
The statute of limitations is similar in both states. South Dakota provides two years with a six-month discovery period for pre-existing creditors. Wyoming also provides two years but allows the period to be shortened to 120 days through a statutory creditor notice procedure.
Trust duration differs slightly. South Dakota permits perpetual duration while Wyoming allows trusts to last 1,000 years. Both are effectively multi-generational, though South Dakota is technically longer.
Exception creditors receive different treatment. South Dakota limits child support and alimony exceptions to those awarded before the transfer and restricts divorcing spouse claims to those married at the time of transfer. Wyoming treats child support claims as exception creditors. South Dakota is slightly more protective on this point.
Trustee requirements differ meaningfully. South Dakota requires a South Dakota resident or licensed trust company to serve as trustee. Wyoming allows the use of a private family trust company where the grantor can serve as manager. For families who want operational involvement in trust administration, Wyoming offers more control.
Both states have no state income tax, so they are equal on this factor.
South Dakota has a larger and more established trust industry, which may provide more institutional trustee options. Wyoming’s trust industry is growing but remains smaller, which may appeal to families who prefer more personal trustee relationships.
Is South Dakota Right for Your DAPT?
South Dakota may be appropriate when you want perpetual trust duration, prefer working with established institutional trustees, want strong conflict of laws protections, want limited exception creditors, or when avoiding state income tax is important to your planning.
Wyoming may be the better choice when you want operational control through a private family trust company, want the ability to shorten the statute of limitations through creditor notice, prefer family members serving in management capacities, or value smaller and more personal trustee relationships.
The choice between jurisdictions involves nuance that depends on your specific circumstances, family dynamics, and long-term goals. Consulting with experienced counsel who understands both jurisdictions is essential to making the right decision.
Conclusion
A domestic asset protection trust in South Dakota offers strong protection through limited exception creditors, a two-year statute of limitations with a clear and convincing evidence standard, and robust conflict of laws provisions. The perpetual duration and absence of state income tax make South Dakota attractive for dynasty planning. Choosing between South Dakota and Wyoming depends on your priorities regarding trustee control and family involvement in trust administration. For guidance on comparing Wyoming and South Dakota for your specific situation, consider consulting Mark Pierce and Matt Meuli at Wyoming Asset Protection Attorney.