Why a South Dakota “Directed Trust”? Simply put, a South Dakota directed trust combines flexibility and control with the skills of the client’s own trusted investment advisors or family members, while also utilizing the favorable trust, asset protection and tax laws of South Dakota.
Specifically, a directed trust allows individuals, who establish a trust with an administrative trustee in the directed trust state, to appoint a trust advisor or investment committee, who in turn can select an outside investment advisor(s) and/or manager(s) to manage the trust’s investments. Multiple advisors may be chosen based upon different asset classes/diversification. This allows a family to utilize and deploy Harvard or Yale Endowment-type asset allocation, which they might not otherwise be able to do with most states delegated trust statutes, as a result of laws, risks, time and costs.
Any type of trust can be established as a directed trust, including both revocable and irrevocable trusts. The trust instrument vests control over investment discretion with an outside advisor and exonerates the administrative trustee. This is also supported by the directed trust statute in South Dakota.
The typical directed trust structure has an administrative trustee, i.e., South Dakota Trust Company® (SDTC), and/or custodian, with an outside investment advisor/manager of the client’s choice being responsible for the trust’s investment management. SDTC® does not have any products or investment management services. There are many different ways of structuring each scenario based upon the client’s desires and needs.
The trust’s investment committee or trust advisor, which is typically comprised of the client’s family members, selects who will be responsible for the investment management of the trust assets. The trust advisor/investment committee and selected investment manager(s) then directs the administrative trustee as to how the trust will be invested and generally invests pursuant to an Investment Policy Statement. SDTC® titles all investment accounts to the trust.
Additionally, a distribution committee may be established to determine when trust distributions should be made and directs the administrative trustee accordingly. Family members can serve on these distribution committees and determine all distributions of income and principal for “health, education, maintenance and support” (HEMS). Any additional distributions would be tax sensitive and require an independent trustee (i.e., SDTC® as administrative trustee, CPAs, and/or Attorney etc.). South Dakota is one of only a few directed trust states with statutes allowing the administrative trustee to accept “direction” regarding distributions, as well as investments. The administrative trustee can typically be removed at any time and, alternatively, if desired the administrative trustee can step into any of the committee functions.
Key Advantages of a Directed Trust
- Dramatically lower family and/or individual’s fiduciary liability
- Ability to hold one trust asset – Public or private
- Versus diversifying
- Ability to override Prudent Investor Act
- Ability to broadly diversify
- Similar to Harvard or Yale Endowment asset allocation model
Please see: “Myths about Trusts and Investment Management: The Glass is Half Full!” Trusts & Estates Magazine, December 2014.