South Dakota, which has a reputation as a favorable place to manage trusts, wants reimbursement for creating such an environment.
While most states stipulate that trusts must end and pay taxes upon distribution, South Dakota allows them to exist in perpetuity. Besides, there is no personal income tax.
South Dakota welcomes out-of-state entities to set up stand-alone trust companies. But now for the first time the state wants to make sure no millionaires or their trustees get a free ride.
Legislation passed this week imposes a $25,000 charter fee aimed at out- of-state trust companies. The fee, which goes into effect July 1, can be refunded if the trust company employs 10 people in South Dakota for three years. The state also raising its annual minimum taxes on privately held trusts.
"This minimum fee is to reimburse the state for creating an environment under which they can thrive," said James Fry, director of administrative services for the South Dakota Department of Revenue.
A handful of families have established their own trust entities in South Dakota since the state began allowing the practice last year. The relatively low fee and the taxes are not expected to cool demand by wealthy families for perpetual or "dynasty" trusts in South Dakota.
"This is more like a toll than a tax," said banking attorney John P.C. Duncan, a partner in Jones, Day, Reavis & Pogue, Chicago.
Mr. Duncan said the "privilege" was unusual. "Most states don't allow anybody from out of state to do a trust business in their state at all."
South Dakota's perpetuity feature gives banks with trust operations there a competitive advantage. Among those with longstanding trust presences in the state are Citicorp, Norwest Corp., and First Bank System Inc.
"If you put a pencil to it," said Dennis Hoffman, senior vice president of Norwest Bank South Dakota, "those assets build much longer over generations."
Banks in South Dakota pay franchise taxes at a rate of 6% of net income, plus or minus any deductions possible for federal tax.
"It's a fairness issue," Jeffrey J. Rodman, executive director of the South Dakota Bankers Association, said of the impositions on the newcomers under the new act.
"It is still extremely attractive to come here and take advantage of these favorable trust laws," he added. "But if they want to create their own trust entity, the feeling was they should pay some tax to the state."
That is fair, according to David B. Horn, chairman of Graystone Partners, a Chicago firm that consults family offices. Mr. Horn said the South Dakota regulations allowing for perpetual trusts will make it a "popular" jurisdiction.
He added the state's new annual minimum taxes-$500 for the first year to $25,000 after four years-make sense.
"That is a clever way to take advantage of the motives of a private trust," Mr. Horn said.