South Dakota’s rise as a financial haven isn’t about snowcapped peaks or holiday towns—it’s about tax-free profits. According to the Wall Street Journal, executives in private equity, venture capital, and hedge funds have increasingly discovered that states such as South Dakota, Nevada, Wyoming, and Alaska offer trust structures designed to shield carried income from state and local taxation and protect assets from creditors—indefinitely.
These so-called “SoDa trusts” have become a popular strategy. Reporter Miriam Gottfried cited an example of a California-based private equity executive who, on advice from Justyn Volesko, co-head of the family-office unit at wealth advisory firm Cerity Partners, established a South Dakota trust to hold profits from future deals. The result: $100 million in earnings without any state taxes, a savings exceeding $10 million.
Assets administered by South Dakota trust companies have nearly quintupled over the past decade, reaching $814 billion by the end of 2024, the Journal found. Not all of those funds belong to private equity professionals seeking tax relief—many wealthy individuals across sectors have adopted South Dakota trusts to preserve and transfer wealth across generations.
The state’s nongrantor trust structure legally separates the grantor from the assets, which means the trust—not the individual—is considered the owner. The trust pays federal taxes, while the original owner owes state or local taxes only when distributions are made. In the meantime, the trust may acquire assets, rent them out, or use them for collateral without triggering additional tax exposure.
Still, experts caution that such trusts have limits. “Carried interest has always lived in a gray zone between compensation and capital, and asset protection trusts don’t magically change that,” said Randall Fisher, senior counsel at Elville and Associates. “What they can do is separate ownership from control in a way that may reduce exposure to creditor risk, but they don’t recharacterize income for tax purposes.”
Mike Greenwald, director of tax services at Berkowitz Pollack Brant Advisors + CPAs, told GlobeSt.com that South Dakota’s appeal lies in its combination of robust trust laws, no state income or capital gains taxes, and no estate or inheritance tax. “It provides tax efficiency combined with asset protection and wealth preservation,” Greenwald said. “It is ideal for those with carried interests since the gains can be shielded from state taxation. That being said, it is still valuable for anyone with appreciating assets, which could include limited partners in commercial real estate deals.”
But he also warned that investors forgo any current tax benefits their investments might have provided once those assets are placed in the trust.
Fisher added that fund managers should be realistic about what these vehicles can accomplish. “APTs are about risk insulation, not tax alchemy,” he said. “The IRS will still follow the economics.” Still, he noted that commercial real estate investors are “increasingly looking at asset protection trusts not as a tax play, but as a balance-sheet defense strategy—particularly in a market where personal guaranties are still common.”
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