South Dakota Estate Tax: How 99% of Residents Can Avoid

Make sure you do some estate planning if you have at least $1 million in net assets.

Photo of author

Paul Sundin, CPA

Do you have an estate plan?

We'll show you our favorite strategies

The estate tax scares many people, even residents of South Dakota. It is often called the death tax and can result in large tax bills.

In this post, we will take a look at the estate tax for South Dakota residents. We will also touch on the inheritance tax and the gift tax. Let’s dive in.

South Dakota estate tax

If you live in South Dakota and you were concerned about the estate tax I have some good news for you. South Dakota is one of 38 states that does not levy or assess an estate tax.

In reality, even though the estate tax can result in large tax levies, very few estates get caught up in it. It impacts less than 1% of all the states in the United States. This is the case because the exemption limit is so high.

What is the federal estate tax?

But the federal estate tax is a different deal. Even though very few people are subject to it, the rate is upwards of 40% so it is very punitive.

Here’s how it works. When someone passes away, the executor will summarize all of that person‘s assets. This includes real estate, stocks and bonds, business interests, and other assets held.

What is a cash balance plan

These assets will need to be valued at the date of death. The executor does get to reduce the value of the estate by deducting certain expenses such as funeral costs and accounting and legal fees.

The net result is then reduced by any debt that the decedent had. This would include mortgages, credit cards, and medical bills. The estate tax of upwards of 40% is applied to this net amount.

South Dakota gift and inheritance tax

I’ve got some more good news for you. South Dakota does not have an inheritance tax or a gift tax.

Some states actually have an inheritance tax that applies to any money left by someone who lives in the state. This is even applicable in if the person lives in a different state. Fortunately, this is not an issue for South Dakota. 

If you need help preparing your trust’s tax return, look no further than this article. There are many things to consider when preparing this important document. We’ll look at the differences between the trust tax return and an individual’s tax return, as well as tips for minimizing taxes.

In addition, you’ll learn how to avoid common mistakes and maximize your savings. Despite its importance, a trust tax return can still be difficult to prepare.

The first step to preparing a trust tax return is to decide what type of tax return you will be filing. Most trusts will file Form 1041, which identifies the trust. T

his form is due on the 15th day of the fourth month following the close of the taxable year. For calendar-year trusts, this date is April 15, the following year. For estates, the tax return is April 15 of the year following the previous year.

Legally Avoid the South Dakota Estate Tax

You know now that South Dakota does not have an estate tax. But the federal estate tax could still trip you up. There are several strategies that you can use to minimize the tax. Consider the following:

  • Grantor Retained Income Trusts (GRIT)
  • Intentionally Defective Grantor Trust (IDGT)
  • Charitable Gift Annuity
  • Crummey Trusts 
  • Special Valuation of Farms and Businesses
  • Direct Medical and Tuition Payments 
  • Gifts Below Annual Exemption
  • Qualified Terminable Interest Property (QTIP)
  • Grantor Retained Unitrusts (GRUTs)
  • 529 Plans
  • Donor-Advised Funds
  • Irrevocable Life Insurance Trust (ILIT)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Grantor Retained Annuity Trusts (GRATs) 
  • Family Limited Partnerships (FLPs)
  • Charitable Remainder Trusts (CRUT)
  • Dynasty Trusts

Who might consider estate tax planning?

Everybody should consider estate planning. But there are business owners and real estate investors who should be highly concerned. Most folks don’t realize that retirement plan accounts and life insurance are also included in an estate. As such, anybody who is in the following situation should consider some planning strategies:

  • Retirement accounts in excess of $1 million
  • Medical and healthcare professionals
  • People with multiple rental properties and large real estate holdings
  • Partners in passive activities
  • People with life insurance policies of at least $1 million
  • CPAs, engineers, IT professionals
  • People who expect to receive a large inheritance
  • Business owners and entrepreneurs
  • Consultants and advisors with significant earning potential

South Dakota tax issues

South Dakota is actually a very tax friendly state for retired people. It does not tax Social Security, nor does it tax any pensions or 401(k) distributions. South Dakota does not even have an income tax.

Property tax rates are a little bit higher, averaging 1 to 1 1/2% of the home value. But the state does have a variety of programs for senior citizens to reduce that tax.

As you can tell, South Dakota is a very good place to live from a tax standpoint. With no estate tax, no inheritance tax and no gift tax, you can make sure that your wealth is passed down to your heirs.

Leave a Comment

We know that estate planning can be complex. That's why we are there every step of the way.


Estate CPA

Gilbert, AZ