As a result of the favorable South Dakota trust, asset protection, tax and privacy laws, as well as how easy they are to create and maintain, many wealth families are forming their own South Dakota PFTCs.
South Dakota also offers families the flexibility to charter a PFTC in South Dakota while maintaining a full service Family Office in another state (i.e., the resident state of the Family Office). South Dakota is one of the only states allowing for this interstate capability.
The South Dakota PFTC application procedure is both simple and inexpensive ($5,000 application fee and approval generally within three to six months). Additionally, the setup costs are very reasonable and the capital requirement is low (i.e. $200,000).
In addition to the ease of creating and maintaining a South Dakota PFTC, there are several other compelling reasons to establish a regulated PFTC; some of which are listed below:
Exemption from SEC registration:
- Regulated PFTCs are exempt from SEC registration.
- SEC defers to the PFTC jurisdiction’s regulator to examine the PFTC.
- Added family privacy; otherwise, SEC registration is public.
- Ability to establish SEC-exempt business trusts and common trust funds.
- An alternative to SEC-registered collective investment vehicles/partnerships, subject to the 99 investors rule.
- Family acts as trustee with an LLC/PFTC entity owned by the family with directors and officers (D&O) liability and errors and omissions (E&O) insurance protection, versus family members serving individually as trustees with personal liability and without insurance.
Planning Opportunities for deducting trust administration and investment fees (in light of Treas Reg § 1.167-4(d))
The PFTC has generally provided for maximum deductibility of trust administration fees and expenses.
- The final IRS regulations based on Knight v. Comm’r, 552 U.S. 181 (U.S. 2008) requires that investment fees be separated out from the overall trustee fee and subject to the 2% Adjusted Gross Income limitation.
- Planning opportunities with PFTCs may still provide ways to deduct the investment fees in a reasonable manner by utilizing various structures as sister entities to the PFTC.
Flexibility and Efficiency
- Resolution of successor trustee issues.
- Convenience and accessibility.
- Efficient– controls overhead and provides economies of scale.
- Improved family governance .
- 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 on any asset class and provides extensive flexibility with asset allocations.
Additionally, South Dakota is rated the top privacy state in the U.S. for trusts. It is the only state with automatic total seal in perpetuity for all court matters involving trusts.
Excluded from Estate Tax (if properly established)
- IRS ruled, if properly established, the PFTC will not be subject to estate tax inclusion (I.R.S. Notice 2008-63).
Trust Distribution and Investment Decisions
- 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.) as well as legal and tax advisors.
- 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.
South Dakota Lending Statutes
- 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.