January 8, 1991

Thomas C. Barnett Jr.
Secretary-Treasurer
State Bar of South Dakota
222 East Capitol
Pierre, SD 57501

OFFICIAL OPINION NO. 91-02

Inheritance taxation of revocable living trusts

Dear Mr. Barnett:

You have requested an official opinion from this office based upon the following factual situation.

FACTS:

During the past 12 months, there has been a significant increase in the sale of living trusts to citizens of the state of South Dakota. A thorough review of sales promotion materials reveals that these peddlers are almost uniformly representing that utilization of revocable living trusts will result in avoidance of all federal estate taxes and inheritance taxes. The representation that the use of revocable living trusts would obviate all inheritance taxes is inconsistent with my understanding of state law. However, I cannot find a specific reference in the state code to taxation of revocable living trusts. I believe that it is very important to all citizens of the state of South Dakota and, in particular, the elderly who tend to be more susceptible to sales gimmicks, that an accurate statement of applicable law be made available.

Based upon the above factual statement, you have asked the following question.

QUESTION:

By setting up a revocable living trust, will a person avoid South Dakota state inheritance taxes?

IN RE QUESTION:

My answer to your question is "no." A person will not avoid South Dakota state inheritance taxes by setting up a revocable living trust.

The analysis leading to this conclusion begins with an examination of the most pertinent state statute, SDCL 10-40-2(3), which states:

A tax shall be imposed upon any transfer of property, real, personal, or mixed, or any interest therein or income therefrom, in trust or otherwise, to any person, association, or corporation except a county, township, or municipal corporation, within the state, for strictly county, township, or municipal purposes, in the following cases:

(3) When the transfer is of property made by a resident or by a nonresident when such nonresident's property is within this state, or within its jurisdiction, by deed, grant, bargain, sale, or gift, made in contemplation of the death of the grantor, vendor, or donor, or intended to take effect in possession or enjoyment at or after such death. [Emphasis added.]

SDCL 10-40-2(3) imposes the tax on transfers made after the death of the trustor when the trustor reserves in the trust instrument (1) the possession, use or other type of enjoyment of the property transferred; (2) a life interest in or income from the property; (3) the right to withdraw all or part of the principal; (4) the right to revoke the trust, either in whole or in part; or (5) the right to change the beneficiary of the trust. Cf. 34A Am.Jur.2d Federal Taxation, ] 43,251 (1990) et seq. This is not an all inclusive list, but shows the most common types of reserved interest which subject the trust property to the tax on the death of the trustor pursuant to the last section of SDCL 10-40-2(3).

The key phrase for imposing the inheritance tax on a transfer made through a revocable living trust is that the transfer is "intended to take effect in possession or enjoyment at or after death." The South Dakota Supreme Court stated that the purpose of the statute was to tax transfers that are made by deed, grant, bargain, sale or gift, when these instruments are intended to and do accomplish what a will would have brought about, that is, pass property to another 'to take effect in possession or enjoyment after the death of the grantor.'

In Risvold's Estate, 295 N.W. 642, 644 (S.D. 1940) (citations omitted).
The statute imposes the tax on all transfers that by their very nature are substitutes for transfers by will or intestacy such as transfers made through a revocable living trust. The statute is satisfied when the economic benefit of the trust passes to the trust beneficiaries when the trustor dies.

Therefore, I conclude that a transfer made after the death of the creator of a trust (trustor) through a revocable living trust is subject to the South Dakota inheritance tax pursuant to SDCL 10-40-2(3) and that South Dakota inheritance taxes cannot be avoided through establishment of a revocable living trust.

Respectfully submitted,

MARK BARNETT
ATTORNEY GENERAL