What burden do you place on a person when you name him or her as your trustee? For most trusts, the trustee is charged with holding and managing the trust assets, investing them in a prudent manner, and making distributions in accordance with the directions provided in the trust instrument. Each of these responsibilities is accompanied by a number of fiduciary duties that consequently place a heavy load of liability on the trustee’s shoulders.
South Dakota and a few other states have legislated a different option called a directed trust.
Directed trusts trifurcate the trustee responsibilities between an administrative trustee, an investment committee, and a distribution committee. By dividing the traditional responsibilities three ways, each party’s potential liability is reduced, and the administrative burden is lessened. While the extent to which the liability and burden on the administrative trustee is decreased, South Dakota provides the clearest reduction by relieving the administrative trustee of obligations to perform an investment review and make recommendations. The administrative trustee is no longer responsible to invest the trust assets in a prudent manner because that becomes the investment committee’s job. Furthermore, the administrative trustee is not responsible for overseeing or overruling the investment committee’s investment decisions, as long as they are consistent with the directions given in the trust instrument (and most trust instruments provide broad investment language).
Similarly, the distribution committee directs the administrative trustee as to when it should make distributions and how much. Again, the administrative trustee is not burdened with overseeing the distribution process, as long as the distributions are consistent with the direction provided in the trust instrument. If a jaded beneficiary later sues the trustee for making imprudent distributions, liability would solely with the distribution committee, and the administrative trustee would be off the hook.
While the investment committee directs the administrative trustee about asset placement, and the distribution committee directs the administrative trustee as to timing and amount of distributions, the administrative trustee, then, is required to follow the committees’ directions to the extent those directions do not conflict with the trust instrument. In this way, the administrative trustee’s role is substantially simplified compared to the traditional trustee. Due to this simplification, the fees associated with the administrative trustee are also less than that of a traditional trustee.
So what is the benefit for the settlor? Reduced trustee fees aside, many families are becoming more sophisticated about wealth management and wish for greater flexibility in investing their trust assets. A directed trust provides this flexibility by allowing the settlor, as a member of the investment committee, to direct and control the trustee in investment decisions. The settlor, rather than the trustee, chooses investment strategies and opportunities that conform with the settlor’s preferred balance between risk and return. If that preferred balance shifts, the settlor has power to direct the trustee to change the investments accordingly.
South Dakota also provides options for protecting committee members from liability through creating a special purpose entity and by helping committees act on a more informed basis through the use of a trust protector or family advisor. To determine if a directed trust is the right option for you as the centerpiece of your comprehensive estate plan, stay tuned to the South Dakota Advantage blog and contact your Sioux Falls Law Firm, Sioux City Law Firm, or Omaha Law Firm today!