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Sat, 27 Dec 2025 10:39:52 -0800
marlon from private IP, post #14980889
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Why Private-Equity Millionaires Love South Dakota
https://www.msn.com/en-us/money/personalfinance/why-private-equity-millionaires-love-south-dakota/ar-AA1T6t11
Why Private-Equity Millionaires Love South Dakota
© Emil Lendof/WSJ, iStock
A decade ago, a successful private-equity dealmaker left his firm to start a new one. He asked his financial adviser to help him structure the endeavor in a
tax-efficient way.
The executive lived in California, but his adviser recommended that he open a South Dakota trust and give it his share of the profits from his fund’s future
deals. The trust has since received over $100 million in distributions, and the executive hasn’t paid a dime in state taxes.
In total, he has saved over $10 million.
Using a South Dakota trust to avoid taxes on carried-interest income has become a favored strategy for a small but growing cadre of private-equity
professionals. Dubbed “SoDa trusts,” they are gaining ground thanks to wealth advisers who work with large numbers of clients in the industry. Word has
spread on Wall Street around the water cooler and during after-work drinks with friends.
“Clients in their 30s will go to bachelor parties and talk about their trusts,” says Justyn Volesko, co-head of the family-office unit of the wealth adviser
Cerity Partners, who advised the California dealmaker. “After the party, I’ll be getting calls.”
Volesko, who is based in New York, says he has set up more than 80 South Dakota trusts for private-equity clients in various stages of their careers. About half
of his more than 500 clients work in private equity, many at top firms. He declined to name the California dealmaker.
South Dakota is one of a handful of states, including Nevada, Wyoming and Alaska, that have no income tax and allow people who set up trusts to also be a
beneficiary of them. Proponents say the state offers a host of other benefits for trusts—including protection of assets from creditors and the ability to last
forever—that tip the scales in its favor.
It has become an increasingly popular place for the superrich to park their wealth, including many who don’t work in private equity. Assets in South Dakota
trust companies totaled $814 billion as of the end of 2024, nearly five times where they stood at the end of 2014, according to state data.
Much of that is in trusts aimed at allowing people to pass assets down to their heirs while minimizing estate taxes. Private-equity managers are setting up
trusts primarily to save on state and local income taxes, with the benefit of also moving assets outside their estates that could later be taxable.
Carried interest, or “carry,” refers to the share of a fund’s profits—typically 20%—that goes to managers. It represents a significant portion of a
private-equity employee’s potential compensation. Unlike with shares of stock, which can appreciate untaxed until the stock is sold, private-equity managers
have to pay taxes when carry is paid to them, incurring an annual bill.
A South Dakota nongrantor trust solves that problem at the state level. A nongrantor trust’s creator gives up control over the assets, meaning the trust is
responsible for the taxes. Once the trust owns the employee’s share of carry, it can continue to collect that income without the employee having to pay taxes
in the state where they live unless they take a distribution.
Not all financial advisers embrace the strategy. Some say their clients don’t want to introduce the complexity and expense required to set up another trust.
Others say it feels like skating too close to an ethical line, particularly when the federal taxation of carried interest is already a hot-button issue.
Many, including President Trump, have argued that the federal government should tax carry as ordinary income, instead of at the lower long-term capital-gains
rate.
South Dakota trust boosters say everything they are doing to help clients save on state taxes is legal.
“We’re following the tax code,” says David Warren, chairman of South Dakota’s Bridgeford Trust Co., which serves as the trustee for many of Volesko’s
clients. “We’re just better at reading it than most people.”
Warren’s belief in South Dakota’s superiority as a trust jurisdiction is so strong that he once nearly came to blows at a Morgan Stanley event with someone
representing Nevada, a state that offers most of the same benefits.
The ideal time to give carry is right after a new fund is raised. At that point, the employee’s share of profits is worth very little because the fund
hasn’t made many investments. Giving the carry to the trust thus won’t subtract much from the person’s lifetime gift-tax exemption.
Volesko’s clients hire a third-party firm to value the carry. He advises clients to leave their salaries, bonuses and some additional savings out of the trust
so they have enough cash for day-to-day living expenses.
The trust can distribute assets to other beneficiaries such as offspring. The creator of the trust can also take distributions as long as another beneficiary
agrees. In both cases, taxes would be owed on any money taken out.
Most of the time, though, people don’t need to take distributions. The trust can buy such assets as jewelry, art or vacation homes. Its creator can then sign
an agreement with the trust to rent or otherwise use those assets. They can also borrow money from the trust and pay interest to it, providing certain
conditions are met.
There are differences in what states will allow. Volesko’s California client could use his South Dakota trust to buy a vacation home in his home state,
without tax consequences. New York, by contrast, would tax the trust if it contained any New York property. In other words, no Hamptons homes allowed.
Bill Lipkind, a tax attorney at the law firm Wilson Elser in Madison, N.J., who often works with Volesko’s clients, says he has set up hundreds of South
Dakota trusts over the course of his more than five decades in practice.
“Follow the mandate of John D. Rockefeller: own nothing, control everything,” he says. “It’s the only way to fly.”
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
Sat, 27 Dec 2025 17:01:02 -0800
whiteguyinchina from private IP
Reply #17591311
👍
I have a Wyoming LLC and I love it
Registration cost is 1/3 of home state and basically same thing
Sat, 27 Dec 2025 20:31:01 -0800
2tierreality from private IP
Reply #18812103
Excellent state for domestic asset protection trusts as well.
Mon, 29 Dec 2025 20:43:12 -0800
zerosugar from private IP
Reply #18970495
👍
South Dakota is ok for a visit, but I would never live there. It's no man's land and almost no good restaurants too. Not as isolated as Wyoming, but still bad.
@17591311 2tierreality 👍 @18970495 2604:2d80:ea8e:4700:6657:ad6c:fbb1:b378 👍
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