South Dakota Dynasty Trust: Taxation of US Citizens Living in the UK

Concept

A South Dakota dynasty trust is an instrument of US succession planning: an irrevocable trust with no expiry (the state repealed the rule against perpetuities), creditor protection, state income-tax savings and, above all, a GST exemption protecting intergenerational asset transfers from federal estate and generation-skipping transfer tax. While the settlor and beneficiaries live in the US, the structure works exactly as designed.

Relocation changes the tax consequences. A dynasty trust is designed for US law and a US tax environment. When the settlor or a beneficiary becomes tax-resident elsewhere, the destination's attribution, distribution and anti-avoidance rules must be checked. The United Kingdom is the main example below; neither immediate attribution nor the loss of deferral is a universal result.

For the UK that means four groups of rules: the Settlements Code (ITTOIA 2005, s.624 ff.) for income tax; the Transfer of Assets Abroad code (ITA 2007, s.720/731); s.86 and s.87 TCGA 1992 for capital gains; and — from 6 April 2025 — the new residence-based inheritance tax regime that replaced the link to domicile. These rules determine the taxation of a US trust and the extent to which it retains its functions.

Deferral disappears because two tax systems simultaneously attribute the same trust's income to the settlor.

Functions of a dynasty trust under US law

A dynasty trust's functions are defined by US law. South Dakota places no limit on a trust's life, so assets can stay inside it for generations. A GST exemption — $15 million per person from 2026 under the One Big Beautiful Bill Act, permanent and indexed from 2027 — applied correctly at funding shelters all future growth from estate and GST tax at each succeeding transfer. Add the absence of state income tax, strong asset-protection legislation and privacy, and it is clear why the tool became a standard for wealthy American families.

But those very virtues — perpetuity, multi-generational transfer, protection — are framed in US-law terms. Another jurisdiction classifies the same trust under its own rules. To it this is a foreign trust, and the only question is whether it lets a local resident defer or remove tax. The answer depends on that jurisdiction's attribution, distribution and anti-avoidance rules and any applicable exemptions.

Income and CGT: the end of deferral in the country of residence

It is incorrect to assume that undistributed income and gains within a US trust are disregarded by the tax authority of the country of residence. In the UK that is not so: three attribution mechanisms operate at once.

Settlements Code (ITTOIA 2005, s.624 ff.)

If a UK-resident settlor has retained an interest in the trust — and in a typical dynasty trust the settlor and/or spouse remain among the potential beneficiaries — the trust's income is treated as the settlor's own for income-tax purposes and taxed on them as it arises, regardless of distributions. That is the Settlements Code: it targets settlor-interested structures, and a classic US discretionary trust falls within it almost automatically.

Transfer of Assets Abroad (ITA 2007, s.720/731)

The ToAA code has a wider scope. s.720 attributes a foreign structure's income to a UK resident who transferred assets and can benefit; s.731 applies to those who receive benefits, even without being the formal settlor. For a family that moved to Britain with a pre-existing US trust, this means the trust's income can be attributed to the resident even where the Settlements Code, for whatever reason, does not apply.

Capital gains: s.86 and s.87 TCGA 1992

Gains have their own rules. s.86 attributes a non-resident trust's gains to a UK-resident settlor who retained an interest. Where s.86 does not reach, s.87 takes over: gains pool in the trust and are taxed on resident beneficiaries as they receive capital payments, often with a supplementary charge for the deferral. The result is the same: the built-in gain within a dynasty trust is recognised for UK CGT.

The end of protected settlements (from 6 April 2025)

Before April 2025, trusts created by non-domiciled individuals before they became deemed-domiciled enjoyed protected-settlement status: foreign income and gains inside the trust were not taxed while they stayed inside and were not distributed to the resident. This was the relief often relied on. The non-dom reform removed it. From 6 April 2025 protected-settlement status is abolished: once the settlor is a long-term resident, the trust's income and gains arising after that date are taxed on them under the ordinary rules — the Settlements Code, the ToAA code and s.86/s.87 apply without the former relief.

IHT is now residence-based: the trust falls into relevant property

The most serious change is to inheritance tax. From 6 April 2025 the historic link to domicile was replaced by a residence test. This changes the taxation of any foreign trust behind which stands a settlor who has lived in Britain for a long time.

Long-term resident: the 10-⁠of-⁠20 test

An individual becomes a long-term resident for IHT after being UK tax-resident for at least 10 of the previous 20 tax years. From that point IHT applies to their worldwide estate — as it once did to a domiciled person. The tax consequences of the status continue after departure for a period ranging from three years (for those resident 10–13 years) to ten years for those resident 20 years or more.

Relevant property: entry, ten-⁠year and exit charges

From 6 April 2025 a trust's status mirrors the settlor's. If a trust is settled or funded by someone who is a long-term resident, its non-UK assets fall into the relevant property regime: a possible entry charge on funding (at the lifetime-chargeable-transfer rate — up to 20%), then periodic charges every ten years (up to 6% of value) and exit charges when assets leave. For a long-standing dynasty trust this means the settlor's move to Britain and crossing the LTR threshold can bring the whole trust within UK IHT.

A separate issue is gift with reservation of benefit. Because the settlor in a dynasty trust usually stays among the beneficiaries, they have reserved a benefit in the property given away. Under the GWR rules such assets are treated as remaining in their estate and charged to IHT at 40% on death — alongside the relevant-property charges at the trust's own level. An economic overlap of the two regimes can arise.

Application

After relocation, a dynasty trust retains a domestic US benefit rather than an international one. Its value lies in three aspects. Asset protection: South Dakota's creditor-protection law works regardless of where the beneficiary lives. The GST exemption: for US tax purposes the trust still exempts intergenerational transfers from estate and GST tax. Avoiding US probate: assets held in trust do not pass through the American probate process.

The practical takeaway is to design or revisit the structure before relocating, not after. It is a question of timing: when the trust is created and funded, when the long-term-resident threshold is crossed, and which destination country is chosen — anti-avoidance rules may be softer or harsher than in the UK. The choices are individual and call for coordinated advice on both sides of the border; there are no blanket guarantees here.

Risks

A second category of risk is compliance and double taxation. The American remains subject to US tax and citizenship-based reporting (for the IRS such a trust is usually a grantor trust, transparent, with Forms 3520/3520-A) and at the same time falls under UK rules. Reconciling two regimes without additional tax is not always possible: in places a foreign tax credit will absorb the overlap, in others it will not, and then the same income is genuinely taxed twice. This is not a flaw of any particular trust but a structural asymmetry to be modelled in advance.

Other jurisdictions: the same tests applied

The British case is the sharpest but not unique. The country of residence applies its own rules on attribution and distributions; settlor attribution is not a universal outcome. Civil-law countries often do not recognise the trust as an institution at all: for them the assets either stay with the settlor outright or are recharacterised as a gift or a foundation. Russian CFC rules may apply where a Russian tax resident meets the control conditions; reporting and taxation of profit have their own conditions and exemptions.

Leaving the country does not end the tax consequences immediately. Many regimes retain tax consequences after departure: for UK IHT the period runs from three to ten years after departure, and some jurisdictions charge an exit tax on latent gains at the moment residence changes. So cross-border planning turns not only on the moment of entry into a country but on the exit scenario — and on how favourably the destination country itself treats foreign trusts.

Those destination rules are compared side by side in the guide to relocating with a trust: twelve countries on the tax classification of the trust, what a settlor's or beneficiary's arrival triggers, whether a new-resident regime shelters trust income, and what the country left keeps. Germany attributes a foreign trust's income to a German-taxable settlor under § 15 AStG, Canada deems the trust resident once there is a resident contributor, Spain disregards it, and the UAE levies no personal income tax at all. How South Dakota itself compares with Nevada, Delaware, Wyoming and the offshore centres on duration, creditor tests and directed-trust rules is in the map of trust jurisdictions.