{"id":8708,"date":"2023-08-17T18:44:06","date_gmt":"2023-08-18T01:44:06","guid":{"rendered":"https:\/\/familyenterpriseusa.com\/?p=8708"},"modified":"2023-08-17T18:44:13","modified_gmt":"2023-08-18T01:44:13","slug":"family-business-interests-as-a-trust-asset-and-the-south-dakota-directed-trust","status":"publish","type":"post","link":"https:\/\/familyenterpriseusa.com\/family-businesses\/family-business-interests-as-a-trust-asset-and-the-south-dakota-directed-trust\/","title":{"rendered":"Family Business Interests as a Trust Asset and the South Dakota Directed Trust"},"content":{"rendered":"

[et_pb_section fb_built=”1″ _builder_version=”4.16″ custom_padding=”4px|||||” global_colors_info=”{}”][et_pb_row _builder_version=”4.16″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_divider color=”#397389″ divider_weight=”2px” _builder_version=”4.19.4″ _module_preset=”default” global_colors_info=”{}”][\/et_pb_divider][et_pb_button button_url=”https:\/\/familyenterpriseusa.com\/polling-and-research\/contact-your-representatives-in-congress-to-join-the-congressional-family-business-caucus-now\/” button_text=”Over-Regulation Hurts the Economy: Tell Your Representatives to Stop!” button_alignment=”center” disabled_on=”off|off|off” admin_label=”Call to Action Button Top” _builder_version=”4.21.0″ _module_preset=”default” custom_button=”on” global_module=”7025″ saved_tabs=”all” global_colors_info=”{}”][\/et_pb_button][et_pb_divider color=”#397389″ divider_weight=”2px” _builder_version=”4.19.4″ _module_preset=”default” global_colors_info=”{}”][\/et_pb_divider][et_pb_text admin_label=”Content” _builder_version=”4.21.0″ text_font=”||||||||” text_font_size=”16px” background_size=”initial” background_position=”top_left” background_repeat=”repeat” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]<\/p>\n

Trusts have grown enormously in popularity since the mid-1990s as a result of the devel\u00adopment of modern trust laws, the dramatic increase in wealth and evolving family needs and goals. Modern trust laws promote many key desires of a client\u2019s estate planning, such as flexibility, control, tax savings, asset protection, family values, governance, succession, education and privacy.<\/h2>\n

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However, when designing and structuring a client\u2019s estate plan, these key desires may not be properly coordinated with the selection of trust\u00adees, the type of trust and the type of trust administration. The assets funding the trust are another key factor that often gets overlooked and as a family\u2019s net worth increases, their assets can be quite diverse.<\/h3>\n

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In the United States, the top 10-12 percent of households own a large percent of illiquid assets, for example, closely held family businesses and real estate, which aren\u2019t generally viewed as ideal assets for the typical non-modern trust<\/a>. Moreover, many large institutional trustees are hired to provide full service (one stop shopping) trust administration. Many of these large institutional trustees may be reluc\u00adtant to invest in anything but their own previously approved trust investment products that they\u2019re familiar with and can easily monitor internally. Consequently, the products offered for trusts are usually more limited due to possible liability concerns. The trustee may view many of the desired asset allocation categories as too risky for a non-modern trust. Additionally, these large full service trustees<\/a> generally have the ability to delegate investment management for products and services they don\u2019t provide, though such institutions are often reluc\u00adtant to do so as a result of the risk and possible liability associated with such delegation.<\/p>\n

It\u2019s also important to note that 70 percent of all wealthy families don\u2019t use corporate fiduciaries. Popular trustee and co-trustee choices are: family members, business colleagues, friends, lawyers, CPAs and other advisors. However, most individual trustees don\u2019t have the requisite invest\u00adment advisory and management expertise, and serving as trustee subjects an individual to very high standards of fiduciary liability as well as personal liability. <\/p>\n

Modern South Dakota Directed Trusts<\/strong><\/p>\n

For trusts that hold closely held family business interests, the South Dakota directed trust is one of the most popular types of modern trust administration structures. A South Dakota directed trust generally trifurcates the traditional trustee role into an investment committee, distribution committee and a directed administrative trustee. The latter is typically a corporate administrative trustee based in South Dakota. Generally, if the trust is properly administered and has a substantial presence in South Dakota, the client\u2019s resident state will recognize the trust and South Dakota\u2019s<\/a> directed trust laws. A South Dakota directed administrative trustee has no discretionary investment duties regarding the trust. The selection of asset allocation, monitoring and\/or investment management is generally the responsibility of the investment committee (not deemed a co-trustee but instead a co-fiduciary), which is usually run by the family and the family advisors. The investment commit\u00adtee members are typically subject to a gross negligence\/willful misconduct standard of liability for serving in this role. This is a much lesser liability standard than serving individually and thus a South Dakota directed trust provides significantly more fiduciary protection. Further, there are few investment limitations with a directed trust as long as the trust investment management language allows for the investments, the investments are legal and they don\u2019t have any environmental issues. Typically, advisors will draft trust investment clauses as general powers and generally won\u2019t prohibit any specific types of investments. To further protect the investment committee of a directed trust, a trust protector may be added with the power to approve and\/or veto trust investments.<\/p>\n

A closely held family business may either be the main asset or a substantial asset of the trust as diversification isn\u2019t generally required with a typical directed trust. The investment committee of a directed trust would be responsible for making decisions regarding the business interest held by the trust and again, subject to a lower liability standard (that is, gross negligence\/willful mis\u00adconduct). The South Dakota directed trust is a powerful tool to allow a family to maximize its estate-planning goals in the most advantageous manner.<\/p>\n

For additional information on this or any topic, please visit our website at www.sdtrustco.com<\/a> or contact us at (605) 338-9170.<\/p>\n

About South Dakota Trust Company LLC<\/a>:<\/strong><\/em><\/p>\n