Tax Benefits of Creating a Charitable Trust in South Dakota
Many people are inclined to use their assets to help leave the world a better place when they die. Some folks want to leave behind a philanthropic legacy. Others just want to use the money that they will no longer need to do some good in the world. The benefits of a charitable trust justify its application for this purpose.
Creating a charitable trust in South Dakota offers additional state-level tax benefits, as the state has no state income tax, capital gains tax, or estate tax. This allows trust assets to grow and be distributed without state-imposed tax burdens, maximizing both philanthropic impact and wealth preservation.
South Dakota State Tax Benefits
No State Income Tax: South Dakota does not impose a state income tax on individuals or on income retained within a trust. This means that interest, dividends, and other income generated by the trust can accumulate free state-level taxation.
No Capital Gains Tax: Assets in a South Dakota trust are not subject to state capital gains tax when they are sold for a profit. This is a major advantage for trusts holding appreciated assets, such as real estate, artwork, or securities, as it allows for more efficient growth of the trust corpus.
No Estate or Inheritance Tax: South Dakota does not levy any state estate or inheritance taxes. This ensures that wealth can be transferred to charitable and non-charitable beneficiaries across generations without being eroded by state transfer taxes.
Perpetual Duration (Dynasty Trusts): South Dakota has abolished the rule against perpetuities, allowing trusts to exist indefinitely. This enables long-term asset growth and protection across multiple generations while potentially avoiding federal estate taxes as assets pass from one generation to the next.
Federal Tax Benefits for Charitable Trusts
In addition to the state benefits, charitable trusts in South Dakota, when structured correctly as either Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs), also provide federal tax advantages:
Immediate Charitable Deduction: Grantors can receive an immediate federal income tax deduction for the present value of a charitable contribution.
Capital Gains Tax Avoidance (on Contribution): When appreciated assets are transferred to a CRT, the grantor may avoid immediate federal capital gains tax on the appreciation.
Reduced Estate and Gift Taxes: Charitable trusts can be used to lower the value of the grantor's taxable estate, potentially reducing federal estate and gift taxes on assets passed to non-charitable heirs.
Key Considerations
To leverage South Dakota's favorable trust laws, the trust must have a legal nexus to the state, often achieved by appointing a South Dakota-based corporate trustee, such as Wealth Advisors Trust Company.
Sure, there are plenty of tax and wealth benefits for you and your family included in setting up a charitable trust, but let’s not forget the peace of mind you will achieve by knowing you are using your wealth to do some good in the world. The philanthropic aspect of a charitable trust means you can choose the causes that are most important to you and use the assets you have earned throughout your life to give back to them. The possibilities are endless, and let us not forget you cannot take it with you.
For guidance on structuring a trust to meet your specific philanthropic and financial goals, you can consult with one of our Fiduciary Strategist team by visiting www.wealthadvisorstrust.com
Disclosures Please be advised that nothing in this newsletter may be interpreted as legal advice specific to any one individual or situation. For specific recommendations that pertain to you, it’s best to consult with a legal advisor.
