If you live in a high-tax state and have significant investment income or carried interest, this one’s for you.
New York City and California high income residents pay over 13% in state & local taxes. For private equity and venture professionals with carried interest, or anyone with large capital gains, that state tax bill can run well into seven figures over a career.
A properly structured irrevocable non-grantor trust in a state like South Dakota — which has no income tax, no capital gains tax, and allows trusts to continue in perpetuity — can potentially eliminate that state tax burden on undistributed income. The Supreme Court’s Kaestner decision reinforced that states cannot constitutionally tax a trust’s undistributed income solely because beneficiaries reside there.
South Dakota has been building the most trust-friendly legal framework in the country for decades: dynasty trusts with no expiration, directed trust statutes that allow the grantor to maintain governance without triggering estate tax inclusion, and domestic asset protection trust laws.
For carried interest specifically, this has become a cornerstone strategy. The carry is transferred to the trust early — ideally before major appreciation — and gains recognized inside the trust avoid state and local income tax entirely while also removing those assets from the taxable estate. The OBBA increased the gift and estate tax exemption to $15M per individual ($30M per couple) in 2026, further expanding the planning window.
When does this make sense?
- You’re domiciled in a state with income tax above ~5% and have substantial investment or carried interest income
- You have assets that are expected to appreciate significantly over time
- You’re comfortable giving up certain direct control (the trust must be a non-grantor trust for state tax benefits)
- You want to combine state tax avoidance with estate planning and asset protection
Important caveats — and these are serious:
- Executing this strategy has high upfront costs and typically $5K++ expense every year thereafter
- Your home state may challenge these structures and some states like Illinois have rules that make the potential savings less favorable.
- Not all ‘trust’ states are equal — South Dakota, Nevada, Wyoming, and Delaware all offer no income tax, but South Dakota’s perpetual trust duration, privacy laws, and directed trust statutes have made it a popular recent trust location
The savings potential is enormous, but so is the complexity. Work with a trust and estate attorney who understands both the trust jurisdiction and your home state’s tax rules.
Meet the Authors
David Snider
David Snider is the Founder & CEO of Harness, a platform to power entrepreneurial tax advisors & their clients. Harness was recognized by Inc Magazine as one of the 200 fastest growing companies in the U.S. David incubated Harness as an executive-in-residence at Bain Capital Ventures. Previously he served as COO & CFO of Compass, a real estate tech company that he helped grow from pre-launch to a valuation of $1.8 billion. David was an investor at Bain Capital private equity, where he completed investments worth over $2 billion as well as the IPO of Sensata on the NYSE. He is the author of Money Makers, published by Macmillan.
This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, the reader is encouraged to consult with the professional advisor of their choosing.
